Understanding variance analysis | Profit (Accounting) | Variance

ASSIGNMENT OF MANAGEMENT CONTROL SYSTEM ON VARIANCE ANALYSIS

SUBMITTED TO: Dr. Navjot kaur

SUBMITTED BY: Nancy rani MBA 4(B)

this kind of analysis can be invaluable in a complex business. show that more was spent than was planned for those items. Though difficult. hours worked. costper-hour on direct labor. both positive and negative. When actual results are better than the expected results. Some cost-accounting systems separate variances into many types and categories.VARIANCE ANALYSIS: A variance is the difference between an actual result and an expected result. Sometimes a single result can be broken down into many different variances. and fixed and variable overhead variances. and the negative variance for literature in March. In this example.000 positive variance for literature in February means $7. the $5. The negative variance means spending more than the budget. The negative variance for advertising in February and March. Variance analysis for sample company Illustration 1.000 positive variance in advertising in January means $5. and the $7. . Variance analysis looks after-the-fact at what caused a difference between plan vs. Variance analysis ranges from simple and straightforward to sophisticated and complex. shows the Profit and Loss Variance table for the hypothetical company used as an example in Part 1 and Part 2 of this series.000 less than planned was spent. . The process by which the total difference between standard and actual results is analysed is known as variance analysis. Look for specifics . the positive variances are good news because they mean spending less than budgeted. The most sophisticated systems separate unit and price factors on materials. below.000 less than planned was spent. In theory. actual. Good management looks at what that difference means to the business.

at least it appears that the costs on completion were $6. the positive variance of $5. Every variance should stimulate questions.401.000 variance for the new literature expenses in February. Is this good news or bad news? It may be evidence of a missed deadline for literature that wasn¶t actually completed until March. Systems sales are way below expectations for this same period±could the advertising missed in January be a possible cause? Among the larger single variances for an expense item in a month shown on the illustration was the positive $7. Why did one project cost more or less? Were objectives met? Is a positive variance a cost saving or a failure to implement? Is a negative variance a change in plans. a management failure. Positive variances aren¶t always good news. a bit less than the $7.Illustration 1: Profit and Loss Variance Evaluating these variances takes thought. If so. but it also means that advertising wasn¶t placed.000 planned.000 in advertising means that money wasn¶t spent. For example. or an unrealistic budget? .

some of these important questions might go unasked. Illustration 2: Sales Forecast Variance The units variance shows that the sales of systems were disappointing. Without this data. Could there be a correlation between the saved expenses in mailing. . There can be very significant differences between higher or lower sales because of different unit volumes. and the lower-than-planned sales? Yes. In the expenses outlined in Illustration 1. or because of different average prices. but as a result the planned sales never came. The positive expense variance is not good for the company. Illustration 2 shows the Sales Forecast table (including costs) in variance mode. of course there could. we see that advertising and mailing costs were below plan. The mailing cost was much less than planned. for the example company. More on variance Variance analysis on sales can be very complex.A variance table can provide management with significant information.

It is often hard to tell what caused differences in costs. complete with linked formulas.In systems. or a new trend? This clearly depends on the specifics of your business. Keep track of the original plan and manage changes carefully. Business Plan Pro Premier Edition has Planned. mainly through variance analysis. Note when actual results indicate you need to make changes. Management probably wants to know the results per unit. variance might be caused simply by lower unit volume. going under budget is a positive variance. If spending schedules aren¶t met. As each month closes. 2. in which lower units yielded higher sales (indicating much higher prices than planned). 4. The lower-than-expected unit sales also had lower-than-expected sales values. save a copy of your plan in Business Plan Pro and then type actual results into the sales forecast. Is this an indication of a new profit opportunity. you will often find the need to set new goals and make course corrections. the comparison between units variance and sales variance yields no surprises. Compare that to service. and milestones Actual tables. don¶t be afraid to update your plan and keep it alive. The starting sales plan The example begins in this first illustration with the sales forecast imported from a finished business plan. Prescription for live planning 1. because it has actual results for the months already completed. You have to track follow up on budgets. . But the real test of management should be whether or not the result was good for business Part 1: Implement Your Plan and Keep It Alive As you review implementation results with the people responsible. and the detailed feedback on the marketing programs. type actual results over your revised plan numbers into the Actual area. and the actual price. Then watch what the variance views tell you. it is already more accurate than the original plan. to facilitate active cash flow analysis. the main guide is common sense. After your plan starts. Although changes should be made only with good reason. 3. Stay in the Business Plan Pro Actual mode and make adjustments to future months of your Actual cash plan. or the budgets are useless. Although variance analysis can be very complex. profit and loss.. After all. In general. and over budget is a negative variance. Actual and Variance tables. Variance analysis is vital to good management.

Illustration 1: Beginning Sales Plan Actual results for sales In the next illustration. you see the actual results for the same company for the first three months of the plan. showing actual sales numbers. at the end of March. .

Illustration 2: Actual Sales Results .

and Illustration 4: Adjusted Sales Plan in Actual Table. Compare the difference in the February and March columns in Illustration 1: Beginning Sales Plan (the original plan) above. actual results (or variance) for this hypothetical company. actual sales The third illustration below shows you the plan vs. 3. In this example.0 automatically shows plan vs. The actual results area can then become a plan area for course corrections. 4. you can make changes to your plan in the future months of the actual tables. they should estimate the revised forecast. The Management Dashboard in Business Plan Pro 11. actual results for the different tables. Adjusting the sales plan One of the main advantages of creating a plan on a computer is how easily you can change it. as you record your actual results. Unit sales for service are disappointing. (the actual results area). The average revenue for systems sales is also disappointing. . but dollar sales are way up. if the company knows by March that sales will be different than planned in April. When the actual results are available. Unit sales of systems are disappointing. Month by month.Plan vs. Sales are well above expectations for software and training. as a correction to future results. and be able to see the plan vs. preserve the plan tables. Illustration 3: Sales Variance As you look at the variance for the sales forecast for the first three months. you should see several important trends: 1. actual variance. they can then replace the revised plan numbers with actual results. well below expectations. 2.

in the real world. and±most importantly±cash. The same revision affects projected profits. Part 2: Cash Flow and Profit and Loss Catching trends as they develop A Plan vs. even before they happen. they planned on it and made a revised forecast in the actuals area. Actual Cash Flow table for the same sample plan shown in Part 1 of this series would show the variance in cash flow and cash balance and how much can change. to reflect the changes shown in the January-March period. .Illustration 4: Adjusted Sales Plan in Actual Table Illustration 4 shows how this company makes its course corrections with revisions in the April and May columns of the Sales Forecast Actual table. Since the company knew systems sales would be down. despite good planning. A company needs to adjust to change by keeping its plan live. balance sheet.

Actual Cash Flow You can see in this illustration how much the cash flow changed as the actual sales differed from plan. if planned in advance.. The projected cash flow in the revised scenario is acceptable to the bank.Illustration 1: Plan vs. Tracking variances is the best way of following through to assure implementation and the success of the business plan. The company had to make significant adjustments to its short-term credit management in order to compensate for changed plans. It postponed payments of short-term debt on its credit line and planned on additional adjustments with the short-term credit line. This points out the importance of keeping a live plan and making adjustments. . The starting plan for profit and loss Following the example in this series of articles. and sales and marketing expense area of the Profit and Loss table for the sample company. the Planned Profit and Loss illustration shows the gross margin.

and expenses are different from planned results. the actual results illustration means little without comparison to the original budget in Illustration 2 above.Illustration 2: Planned Profit and Loss Actual results for profit and loss The next illustration shows the actual results recorded in that portion of Profit and Loss table. Illustration 3: Actual Profit and Loss Results . Looking at Actual Profit and Loss Results. costs. Note how actual sales. after the end of March.

This is a portion of the table. Variance analysis . variance becomes the planned amount minus the actual amount. variance becomes actual amount minus planned amount. and cash flow is satisfactory±comparisons with the original budget are made poorly or not at all. Planned vs. discussed. actual profit and loss The following illustration. shows the variance in expenses. Unfortunately. leaving negative numbers when the actual spending was more than budget or when the sales or profits were less than budget.Plan vs. The actual results are subtracted from the budget numbers. In the profits and sales areas. Illustration 4: Planned vs. y y In expense rows. accepted. Lower expenses are a positive variance. especially the small. Especially if business is going well±the operation shows a profit. causing another negative variance. Budgets are too often proposed. for a large negative variance. Sales and Marketing expenses were also above plan in March. Part 3: Understanding Variance Analysis Understanding variance analysis Many businesses. ignore or forget the other half of the budgeting. In these cases. Actual Profit and Loss. higher sales are a positive variance. Actual Profit and Loss The illustration shows a portion of the Profit and Loss Variance table. entrepreneurial kind. March results showed sales below plan and costs above plan. many businesses also forget to compare the original to the actual. Variances are calculated differently in different portions of the plan. and forgotten.

both positive and negative. In this example.000 positive variance in advertising in January means $5.000 positive variance for literature in February means $7. below. Good management looks at what that difference means to the business. hours worked. and the $7.000 less than planned was spent. In theory. and the negative variance for literature in March. The most sophisticated systems separate unit and price factors on materials. show that more was spent than was planned for those items. and fixed and variable overhead variances. the positive variances are good news because they mean spending less than budgeted. The negative variance means spending more than the budget. Variance analysis ranges from simple and straightforward to sophisticated and complex. Sometimes a single result can be broken down into many different variances. costper-hour on direct labor. the $5. Though difficult. shows the Profit and Loss Variance table for the hypothetical company used as an example in Part 1 and Part 2 of this series. Look for specifics This presentation of variances shows how important good analysis is.looks after-the-fact at what caused a difference between plan vs. this kind of analysis can be invaluable in a complex business.000 less than planned was spent. Some cost-accounting systems separate variances into many types and categories. The negative variance for advertising in February and March. Variance analysis for sample company Illustration 1. actual. Illustration 1: Profit and Loss Variance .

But the real test of management should be whether or not the result was good for business. a bit less than the $7. or the budgets are useless.401.Evaluating these variances takes thought. Compare that to service. Systems sales are way below expectations for this same period±could the advertising missed in January be a possible cause? Among the larger single variances for an expense item in a month shown on the illustration was the positive $7. but as a result the planned sales never came. we see that advertising and mailing costs were below plan. Without this data. some of these important questions might go unasked. The lower-than-expected unit sales also had lower-than-expected sales values. .000 planned. In general. Although variance analysis can be very complex. The positive expense variance is not good for the company. of course there could. Is this good news or bad news? It may be evidence of a missed deadline for literature that wasn¶t actually completed until March. In systems. variance might be caused simply by lower unit volume. or an unrealistic budget? A variance table can provide management with significant information. the positive variance of $5. Management probably wants to know the results per unit. Variance analysis is vital to good management. The units variance shows that the sales of systems were disappointing. mainly through variance analysis. and over budget is a negative variance. The mailing cost was much less than planned. It is often hard to tell what caused differences in costs. and the actual price. Could there be a correlation between the saved expenses in mailing. and the detailed feedback on the marketing programs.000 variance for the new literature expenses in February. Is this an indication of a new profit opportunity. at least it appears that the costs on completion were $6. going under budget is a positive variance. or a new trend? This clearly depends on the specifics of your business. For example.000 in advertising means that money wasn¶t spent. In the expenses outlined in Illustration 1. in which lower units yielded higher sales (indicating much higher prices than planned). a management failure. Every variance should stimulate questions. If so. Positive variances aren¶t always good news. If spending schedules aren¶t met. You have to track follow up on budgets. and the lower-than-planned sales? Yes. but it also means that advertising wasn¶t placed. Why did one project cost more or less? Were objectives met? Is a positive variance a cost saving or a failure to implement? Is a negative variance a change in plans. the main guide is common sense. the comparison between units variance and sales variance yields no surprises.

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