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Variance analysis is a very important task to be performed by businesses of all sizes.
Frequency:
This analysis is performed at month end for financial reviews, however for internal management decisions it can be more frequent depending on the industry. e.g. FMCG report on variances on a daily and weekly basis to support brand managers and sales teams to achieve their targets.
Type of variance analysis:
The most common variance analysis is Budget vs Actual results,
this is calculated for each line item in the Income statement for monthly finance reviews with top management.
For operational decisions during the month, the variances are calculated in detail by category such as
1. sales by region variance,
2. sales by sku variance.
3. cost of sales for food variance
4. cost of sales for beverage variance.
The use of such a variance depends on the end user:
1. Finance dept & HODs may use it to evaluate over/under budgeting
2. Sales HODs will use it to track the performance of their staff, department, and targets. (also impact commissions and incentives)
3. Cost of sales & GP% variance will reflect on the stock controls - which is extremely important from an internal control perspective. This impacts the HODs performance, targets, stock (asset) & finally the bottom line.
4. SGA variance will reflect how the HOD manages their department and the controls required to cut down costs, especially in these tough economic times.
5. Net profit variance will show how far the company / dept is from achieving the profit and contributing towards the company strategy for the year.
Variance Analysis Used to find the Gap Budget Vs Actual & correct over-budgeting & under-budgeting with the appropriate reason of Gap Analysis.
Variance Analysis also used to Know the Management which area needs to be Focus which makes the organisation in decreasing their Profit and Action can to be taken to reduce the Cost & lower the expenses
bench marking as Budget also given for Expenses to the concerned department and Variance analysis works as an Alarm to the management as well as the concerned Department so the cost can be controlled if (exceeding the bench marking) & Profitability or Revenue Targets can be achieved .
Variance Analysis should be used by company to observe and correct over and under budgeting.
