Budgeting Basics and Beyond

8.18. Variance Analysis Reports

Performance reports may be prepared that examine the difference between budgeted and actual figures for:

• Production in terms of cost, quantity, and quality

• Sales

• Profit

• Return on investment

• Turnover of assets

• Income per sales dollar

• Market share

• Growth rate

Variance reports raise questions rather than answering them. For example, is sales volume down because of deficiencies in sales effort or the manufacturer's inability to produce?

Variance analysis reports may be expressed not only in dollars, but also in percentages, ratios, graphs, and narrative.

Performance reports are designed to motivate nonfinancial managers and employees to change their activities and plans when variances exist. They should be terse and concentrate on potential difficulties and opportunities. A section for comments should be provided so that explanations may be given for variances.

The timeliness of performance reports and detail supplied depends on the manager the report is addressed to and the nature of the costs being measured. A production manager may need daily information on the manufacturing operations, the plant manager may need only weekly data, and the vice president of manufacturing may be satisfied with monthly performance figures for each plant. As we become more distant from the actual operation, the time interval for performance evaluation lengthens. Also, as we go up the ladder, performance reports contain data in increasingly summarized form.

Because performance ...