How do you use variance analysis to identify and address operational inefficiencies?

1 Define your variance categories

The first step in variance analysis is to define the categories of variance that are relevant to your business operations. These can be based on different factors, such as time, volume, price, cost, revenue, or quality. For example, you can analyze the variance between the actual and budgeted sales revenue for each month, product, or region. Or you can compare the actual and standard costs of your production inputs, such as labor, materials, or overheads. The more specific and granular your variance categories are, the easier it will be to pinpoint the sources and effects of the deviations.

2 Calculate and interpret your variance values

The next step is to calculate the variance values for each category, and interpret what they mean for your operational performance. There are different methods and formulas for calculating variance, depending on the type and level of data you have. For example, you can use the absolute variance, which is the difference between the actual and budgeted values, or the percentage variance, which is the ratio of the absolute variance to the budgeted value. You can also use the favorable or unfavorable variance, which indicates whether the actual value is better or worse than the budgeted one. To interpret your variance values, you need to consider the context and significance of each category, and how it affects your operational goals and objectives.

3 Identify and report the variance drivers

The third step is to identify and report the causes and consequences of the variances, and how they can be addressed or leveraged. This is where you need to dig deeper into the data and look for the underlying factors that explain why the variances occurred, and what impact they have on your operational efficiency. For example, you can use the sales volume variance to analyze how changes in demand, competition, or marketing strategies influenced your sales revenue. Or you can use the material price variance to evaluate how fluctuations in market prices, supplier negotiations, or inventory management affected your production costs. By reporting the variance drivers, you can provide valuable insights and recommendations for improving your operational decisions and actions.

4 Establish a variance reporting cycle

The final step is to establish a regular and consistent variance reporting cycle, and communicate your findings and feedback to the relevant stakeholders. This will help you monitor and track your operational performance over time, and identify any trends, patterns, or anomalies that require further investigation or intervention. You can use different formats and tools for your variance reporting, such as dashboards, charts, tables, or narratives. The key is to make your reports clear, concise, and actionable, and to align them with your operational plans and targets. By doing so, you can ensure that your variance analysis and reporting are effective and meaningful for your business operations.

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?