How do you update and revise your variance analysis and CVP model based on changing market conditions?

1 Monitor key indicators

The first step is to monitor the key indicators that affect your variance analysis and CVP model, such as sales volume, price, cost, mix, yield, and efficiency. You should track these indicators regularly and compare them with your budgeted or standard values. This will help you identify any significant or unexpected deviations and their causes. You should also benchmark your indicators against your competitors or industry standards to assess your competitive position and market trends.

2 Adjust your budget or standard

The next step is to adjust your budget or standard values based on the changes in the market conditions. For example, if the market demand for your product or service increases or decreases, you may need to revise your sales volume and price assumptions. Similarly, if the market supply of your inputs changes, you may need to update your cost assumptions. You should also consider the impact of inflation, exchange rates, regulations, and other external factors on your budget or standard values. By adjusting your budget or standard, you can make your variance analysis more realistic and meaningful.

3 Update your CVP model

The third step is to update your CVP model based on the changes in your budget or standard values. Your CVP model shows the relationship between your revenue, cost, profit, and volume. It also helps you calculate your break-even point, margin of safety, contribution margin, and target profit. By updating your CVP model, you can evaluate how the changes in the market conditions affect your profitability and risk. You can also use your CVP model to perform sensitivity analysis and scenario analysis to explore different outcomes and strategies.

4 Communicate and act

The final step is to communicate and act on the results of your variance analysis and CVP model. You should report and explain the variances and the CVP model to the relevant stakeholders, such as managers, investors, customers, and suppliers. You should also recommend and implement corrective or preventive actions to address the variances and improve your performance. For example, you may need to adjust your pricing, marketing, production, or purchasing strategies based on your variance analysis and CVP model.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?