How do you communicate and resolve unfavorable variances with your team?

1 Types of variances

There are two main types of variances: price variances and quantity variances. Price variances measure the difference between the actual and budgeted prices of the inputs or outputs of a process. Quantity variances measure the difference between the actual and budgeted quantities of the inputs or outputs of a process. For example, if you buy more materials than you planned, or sell less products than you expected, you have a quantity variance. If you pay more or less for the materials, or charge more or less for the products, you have a price variance.

2 Price variance formulas

The price variance formulas depend on whether you are dealing with inputs or outputs. For inputs, such as materials or labor, the price variance is calculated by multiplying the actual quantity by the difference between the actual price and the budgeted price. For outputs, such as sales or revenue, the price variance is calculated by multiplying the budgeted quantity by the difference between the actual price and the budgeted price. A positive price variance means that you paid or charged more than you planned, while a negative price variance means that you paid or charged less than you planned.

3 Quantity variance formulas

The quantity variance formulas also depend on whether you are dealing with inputs or outputs. For inputs, such as materials or labor, the quantity variance is calculated by multiplying the budgeted price by the difference between the actual quantity and the budgeted quantity. For outputs, such as sales or revenue, the quantity variance is calculated by multiplying the actual price by the difference between the actual quantity and the budgeted quantity. A positive quantity variance means that you used or sold more than you planned, while a negative quantity variance means that you used or sold less than you planned.

4 Variance analysis steps

In order to perform a variance analysis, you must first gather the actual and budgeted data for the inputs and outputs of the process you want to analyze. Then, you must calculate the price and quantity variances for each input and output using the appropriate formulas. After that, you should analyze the variances to identify the reasons and impacts of the deviations from the budget. Finally, you should report the variances to the relevant stakeholders and take corrective actions if needed.

5 Communicating and resolving variances

One of the most important aspects of variance analysis is communicating and resolving the variances with your team. You need to present the variances in a clear and concise way, using charts, tables, or dashboards. You also need to explain the causes and consequences of the variances, and suggest possible solutions or improvements. You should avoid blaming or criticizing your team members, and instead focus on learning and collaborating. You should also encourage feedback and input from your team, and involve them in the decision-making process.

6 Benefits of variance analysis

Variance analysis can help you improve your budgeting and cost management skills, and achieve your organizational goals. Through variance analysis, you can monitor and evaluate your performance and progress, identify and address any problems or opportunities in your process, adjust your plans and forecasts according to the changing conditions, enhance your accountability and transparency, and motivate and empower your team to perform better.

7 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?