Variance Analysis: How to Identify and Explain the Differences Between Budgeted and Actual Results

1. Understanding Variance Analysis

Variance analysis is a crucial aspect of financial management that helps organizations identify and explain the differences between budgeted and actual results. It provides valuable insights into the factors contributing to variations and allows businesses to make informed decisions for future planning.

From a managerial perspective, variance analysis allows managers to assess the performance of different departments or cost centers within an organization. By comparing actual results with the budgeted figures, managers can identify areas of overperformance or underperformance and take appropriate actions to address them. For example, if a department exceeds its budgeted expenses, managers can investigate the reasons behind it and implement cost-saving measures.

From a financial perspective, variance analysis helps stakeholders understand the financial health of a company. It provides insights into the accuracy of budgeting and forecasting processes, highlighting areas where the organization may need to adjust its financial plans. By analyzing the variances between budgeted and actual results, stakeholders can assess the company's financial performance and make informed investment decisions.

1. Understanding the Concept of Variance: Variance refers to the difference between the budgeted or expected amount and the actual amount. It can be positive (favorable) or negative (unfavorable), depending on whether the actual result exceeds or falls short of the budgeted amount.

2. Types of Variances: There are various types of variances that organizations analyze, such as sales variances, cost variances, labor variances, and material variances. Each type focuses on specific aspects of the business and helps identify the key drivers of variations.

3. Causes of Variances: Variances can arise due to various factors, including changes in market conditions, unexpected events, operational inefficiencies, pricing fluctuations, or inaccurate budgeting. It is essential to identify the root causes of variances to implement corrective actions effectively.

4. Analyzing Variances: Organizations use different techniques to analyze variances, such as variance reports, trend analysis, and ratio analysis. These tools provide a comprehensive view of the variations and help identify patterns or trends that can guide decision-making.

5. Corrective Actions: Once variances are identified and analyzed, organizations can take corrective actions to address the issues. This may involve adjusting budgets, revising operational processes, renegotiating contracts, or implementing efficiency measures. Examples of corrective actions could include renegotiating supplier contracts to reduce material costs or implementing training programs to improve labor productivity.

By understanding variance analysis and its various aspects, organizations can gain valuable insights into their financial performance, make informed decisions, and drive continuous improvement. Remember, variance analysis is a powerful tool that enables businesses to identify and explain the differences between budgeted and actual results, ultimately leading to better financial management.

2. Defining Budgeted and Actual Results

One of the most important tasks in financial management is to compare the budgeted and actual results of a business or a project. Budgeted results are the planned or expected outcomes that are based on certain assumptions and estimates. Actual results are the realized or achieved outcomes that are based on the actual performance and events. Variance analysis is the process of identifying and explaining the differences between budgeted and actual results. It helps managers and stakeholders to understand the reasons for the deviations, evaluate the performance, and take corrective actions if needed.

1. Budgeted results are the expected or planned outcomes of a business or a project for a given period of time, such as a month, a quarter, or a year. They are usually based on a set of assumptions and estimates that reflect the goals, strategies, and resources of the organization. Budgeted results can be expressed in various forms, such as revenues, costs, profits, cash flows, or key performance indicators (KPIs).

2. Actual results are the realized or achieved outcomes of a business or a project for a given period of time. They are usually based on the actual performance and events that occurred during that period. Actual results can also be expressed in various forms, such as revenues, costs, profits, cash flows, or KPIs.

3. Variance is the difference between a budgeted result and an actual result. It can be either positive or negative, depending on whether the actual result is higher or lower than the budgeted result. For example, if the budgeted revenue for a month is $100,000 and the actual revenue is $120,000, then the variance is $20,000, which is positive. If the budgeted cost for a month is $50,000 and the actual cost is $60,000, then the variance is -$10,000, which is negative.

4. Variance analysis is the process of identifying and explaining the variances between budgeted and actual results. It involves calculating the variances, analyzing the causes and effects of the variances, and reporting the findings and recommendations to the relevant stakeholders. Variance analysis can help managers and stakeholders to evaluate the performance of a business or a project, identify the strengths and weaknesses, and take corrective actions if needed.

5. Perspectives and approaches for variance analysis can vary depending on the purpose, scope, and level of detail of the analysis. Some of the common perspectives and approaches are:

- Static vs. Flexible budgeting: A static budget is a budget that is prepared at the beginning of the period and remains unchanged throughout the period, regardless of the changes in the actual activity level or conditions. A flexible budget is a budget that is adjusted to reflect the actual activity level or conditions during the period. variance analysis can be done using either a static or a flexible budget, depending on the nature and complexity of the business or the project.

- Favorable vs. Unfavorable variances: A favorable variance is a variance that has a positive impact on the profitability or performance of the business or the project. An unfavorable variance is a variance that has a negative impact on the profitability or performance of the business or the project. Variance analysis can be done using either a favorable or an unfavorable perspective, depending on the objective and the context of the analysis.

- Price vs. Volume variances: A price variance is a variance that is caused by the difference between the budgeted and the actual price of a product, a service, a resource, or an input. A volume variance is a variance that is caused by the difference between the budgeted and the actual quantity of a product, a service, a resource, or an input. variance analysis can be done using either a price or a volume perspective, depending on the type and the source of the variance.

- Sales vs. Cost vs. Profit variances: A sales variance is a variance that is related to the revenue or the income of the business or the project. A cost variance is a variance that is related to the expense or the outflow of the business or the project. A profit variance is a variance that is related to the net income or the bottom line of the business or the project. variance analysis can be done using either a sales, a cost, or a profit perspective, depending on the focus and the level of the analysis.

By defining the budgeted and actual results and the different perspectives and approaches for variance analysis, we can set the stage for a more comprehensive and meaningful analysis of the differences between the expected and the realized outcomes of a business or a project. In the next sections, we will dive deeper into the methods and techniques for calculating, analyzing, and reporting the variances. We will also provide some examples and tips for conducting effective variance analysis. Stay tuned!

3. Identifying Performance Indicators

One of the most important steps in variance analysis is to identify the key metrics that measure the performance of your business or project. These are the indicators that tell you how well you are achieving your goals, and how far you are deviating from your budgeted plan. Key metrics can vary depending on the type of business, industry, and objective, but they usually fall into one of the following categories:

1. Financial metrics: These are the metrics that measure the profitability, liquidity, and efficiency of your business. They include things like revenue, gross margin, net income, cash flow, return on investment, and more. Financial metrics are essential for assessing the financial health and performance of your business, and for making informed decisions about resource allocation, pricing, and cost management. For example, if your variance analysis shows that your actual revenue is lower than your budgeted revenue, you might want to investigate the reasons behind this gap, and take actions to increase your sales, reduce your expenses, or adjust your pricing strategy.

2. Operational metrics: These are the metrics that measure the quality, quantity, and timeliness of your products or services. They include things like production volume, defect rate, customer satisfaction, delivery time, and more. Operational metrics are important for evaluating the effectiveness and efficiency of your processes, and for identifying areas of improvement, optimization, or innovation. For example, if your variance analysis shows that your actual defect rate is higher than your budgeted defect rate, you might want to look into the causes of this problem, and take actions to improve your quality control, training, or equipment.

3. Strategic metrics: These are the metrics that measure the alignment of your activities with your vision, mission, and goals. They include things like market share, customer retention, brand awareness, employee engagement, and more. Strategic metrics are crucial for gauging the long-term success and sustainability of your business, and for adjusting your direction, strategy, or tactics as needed. For example, if your variance analysis shows that your actual market share is lower than your budgeted market share, you might want to explore the factors that influence this outcome, and take actions to enhance your competitive advantage, marketing, or product development.

By identifying the key metrics that matter most to your business, you can focus your variance analysis on the most relevant and impactful aspects of your performance, and use the insights to make better decisions and achieve better results. In the next section, we will discuss how to calculate and interpret the variances for each key metric. Stay tuned!

4. Uncovering Deviations from the Budget

One of the most important aspects of variance analysis is to identify and explain the reasons for the deviations from the budget. Variance analysis helps managers and stakeholders to understand the performance of the business, identify the areas of improvement, and take corrective actions if needed. However, analyzing variances can be challenging, as there are many factors that can affect the budgeted and actual results. In this section, we will discuss some of the steps and techniques that can help you to uncover and explain the variances in a systematic and comprehensive way. We will also provide some examples to illustrate the concepts.

Some of the steps and techniques for analyzing variances are:

1. Define the scope and level of analysis. Depending on the purpose and audience of the analysis, you may need to focus on different aspects of the budget, such as revenues, expenses, profits, cash flows, etc. You may also need to choose the appropriate level of detail, such as by product, department, region, etc. For example, if you are analyzing the variance in sales revenue, you may want to break it down by product category, customer segment, or sales channel.

2. Calculate the variances. The variance is the difference between the budgeted and actual amount for a given item. You can calculate the variance by subtracting the actual amount from the budgeted amount, or vice versa. A positive variance means that the actual amount is higher than the budgeted amount, which is favorable for revenues and profits, but unfavorable for expenses and losses. A negative variance means that the actual amount is lower than the budgeted amount, which is unfavorable for revenues and profits, but favorable for expenses and losses. For example, if the budgeted sales revenue for product A is $100,000 and the actual sales revenue is $120,000, the variance is $20,000, which is positive and favorable.

3. Classify the variances. There are different types of variances that can explain the deviations from the budget, such as price variance, volume variance, mix variance, efficiency variance, etc. Each type of variance measures the impact of a specific factor on the budgeted and actual results. For example, price variance measures the impact of the change in the selling price or the cost per unit, volume variance measures the impact of the change in the quantity sold or produced, mix variance measures the impact of the change in the proportion of different products or services, and efficiency variance measures the impact of the change in the utilization of resources or inputs. By classifying the variances, you can isolate and quantify the effects of each factor on the budgeted and actual results.

4. Analyze the causes of the variances. After calculating and classifying the variances, you need to identify and explain the reasons for the deviations from the budget. You may need to use different sources of information, such as market data, operational data, financial data, etc., to find out the root causes of the variances. You may also need to consider the external and internal factors that can affect the budgeted and actual results, such as market conditions, customer behavior, competitor actions, production issues, quality problems, etc. For example, if the price variance for product A is negative and unfavorable, you may need to investigate whether the selling price was reduced due to market competition, customer demand, or promotional activities, or whether the cost per unit was increased due to inflation, supplier issues, or wastage.

5. report and communicate the results of the analysis. The final step of variance analysis is to report and communicate the findings and recommendations to the relevant stakeholders, such as managers, investors, or regulators. You may need to use different formats and methods, such as tables, charts, graphs, dashboards, presentations, etc., to present the results of the analysis in a clear and concise way. You may also need to highlight the key variances, explain the main causes, and suggest the possible actions or solutions to improve the performance or resolve the issues. For example, if the volume variance for product A is positive and favorable, you may want to report the increase in the market share, customer satisfaction, or brand awareness, and recommend to continue or expand the marketing strategy, product development, or customer service.

5. Exploring Factors Behind Variances

One of the most important steps in variance analysis is to identify and explain the root causes of the differences between the budgeted and actual results. Root cause analysis is a systematic process of finding and addressing the underlying factors that lead to a problem or an outcome. By conducting a root cause analysis, managers can gain a deeper understanding of the sources of variances, the impact of those variances on the performance of the organization, and the actions that can be taken to prevent or reduce them in the future.

There are different methods and tools that can be used for root cause analysis, such as the 5 Whys, the fishbone diagram, the Pareto chart, and the fault tree analysis. However, regardless of the specific technique, the general steps of root cause analysis are:

1. Define the problem or the outcome. This involves stating the problem or the outcome clearly and quantitatively, such as "The actual sales revenue for Q1 was 10% lower than the budgeted amount".

2. collect and analyze data. This involves gathering relevant and reliable data that can help to explain the problem or the outcome, such as historical data, industry data, customer feedback, employee surveys, etc. The data should be analyzed using appropriate statistical methods, such as trend analysis, correlation analysis, regression analysis, etc.

3. Identify possible causes. This involves brainstorming and listing all the potential factors that could have contributed to the problem or the outcome, such as internal factors (e.g., product quality, pricing, marketing, etc.) and external factors (e.g., competition, customer preferences, economic conditions, etc.).

4. Test and verify causes. This involves testing and verifying the validity and significance of each possible cause, using data and evidence. For example, one can use hypothesis testing, confidence intervals, or p-values to determine if a cause has a statistically significant effect on the problem or the outcome.

5. Prioritize and select root causes. This involves ranking and selecting the most important and influential causes that need to be addressed, using criteria such as the magnitude, frequency, or impact of the cause. For example, one can use a Pareto chart to identify the 20% of the causes that account for 80% of the problem or the outcome.

6. Recommend and implement solutions. This involves proposing and executing actions that can eliminate or mitigate the root causes, such as improving processes, changing policies, training staff, etc. The solutions should be aligned with the organizational goals and objectives, and should be monitored and evaluated for their effectiveness and efficiency.

To illustrate the process of root cause analysis, let us consider an example of a company that produces and sells widgets. The company has a budgeted sales revenue of $100,000 for Q1, but the actual sales revenue was only $90,000, resulting in a negative variance of $10,000. The company wants to find out the root causes of this variance and take corrective actions. The following is a possible root cause analysis for this case:

- Define the problem or the outcome: The actual sales revenue for Q1 was 10% lower than the budgeted amount.

- Collect and analyze data: The company collected and analyzed data from various sources, such as sales reports, customer feedback, market research, etc. The data showed that the company's market share, customer satisfaction, and product quality were all lower than expected, and that the company faced strong competition from a new entrant in the market.

- Identify possible causes: The company brainstormed and listed the following possible causes for the variance:

- The company's price was too high compared to the competitors.

- The company's marketing strategy was ineffective and did not reach the target audience.

- The company's product design was outdated and did not meet the customer needs and preferences.

- The company's production process was inefficient and resulted in high costs and low quality.

- The company's distribution network was limited and did not cover the potential markets.

- Test and verify causes: The company tested and verified each possible cause using data and evidence. The company found that the price, marketing, and product design were the most significant causes, as they had a high correlation and a low p-value with the sales revenue. The production process and the distribution network were less significant causes, as they had a low correlation and a high p-value with the sales revenue.

- Prioritize and select root causes: The company prioritized and selected the price, marketing, and product design as the root causes that needed to be addressed, as they accounted for the majority of the variance. The company used a Pareto chart to visualize the relative importance of each cause.

- Recommend and implement solutions: The company recommended and implemented the following solutions for each root cause:

- The company reduced the price of the widgets by 10% to match the competitors and attract more customers.

- The company revised the marketing strategy and used social media, online ads, and influencers to reach the target audience and increase brand awareness and loyalty.

- The company redesigned the product and added new features and functionalities that met the customer needs and preferences and differentiated the product from the competitors.

- The company monitored and evaluated the results of the solutions and found that the sales revenue increased by 15% in Q2, exceeding the budgeted amount. The company also received positive feedback from the customers and improved its market share and product quality. The company concluded that the root cause analysis was successful and helped to solve the problem of the variance.

6. Celebrating Successes

Favorable variances are the differences between the budgeted and actual results that indicate a positive outcome for the organization. For example, if the actual revenue is higher than the budgeted revenue, or the actual cost is lower than the budgeted cost, then there is a favorable variance. Favorable variances can be a sign of good performance, efficiency, and effectiveness. However, they can also be misleading, inaccurate, or temporary. Therefore, it is important to explain the favorable variances and celebrate the successes in a balanced and realistic way. In this section, we will discuss how to do that from different perspectives, such as the management, the employees, the customers, and the stakeholders. Here are some tips and examples:

1. Identify the sources and causes of the favorable variances. The first step is to understand why the favorable variances occurred and what factors contributed to them. This can help to assess the validity and sustainability of the favorable variances, as well as to identify the best practices and areas of improvement. For example, if the actual revenue is higher than the budgeted revenue, it could be due to increased demand, higher prices, better quality, more effective marketing, or a combination of these factors. Similarly, if the actual cost is lower than the budgeted cost, it could be due to lower input prices, reduced waste, improved efficiency, or a mix of these factors.

2. Evaluate the impact and implications of the favorable variances. The next step is to analyze how the favorable variances affect the organization and its goals, objectives, and strategies. This can help to measure the performance and progress of the organization, as well as to anticipate the opportunities and challenges ahead. For example, if the actual revenue is higher than the budgeted revenue, it could mean that the organization has achieved or exceeded its sales target, increased its market share, or enhanced its competitive advantage. However, it could also mean that the organization faces higher expectations, more competition, or more pressure to maintain or improve its results. Likewise, if the actual cost is lower than the budgeted cost, it could mean that the organization has saved or optimized its resources, increased its profit margin, or reduced its risks. However, it could also mean that the organization has compromised its quality, underinvested in its assets, or neglected its long-term needs.

3. Communicate the favorable variances and celebrate the successes. The final step is to share the favorable variances and the explanations with the relevant parties and acknowledge the achievements and efforts of the organization and its members. This can help to motivate and reward the employees, satisfy and retain the customers, attract and impress the stakeholders, and enhance the reputation and image of the organization. For example, if the actual revenue is higher than the budgeted revenue, the management can send a congratulatory message to the employees, offer them a bonus or a recognition, and invite them to a celebration event. The management can also thank the customers for their loyalty and support, offer them a discount or a loyalty program, and invite them to a feedback session. The management can also inform the stakeholders about the results and the reasons, offer them a dividend or a share buyback, and invite them to a presentation or a meeting. Similarly, if the actual cost is lower than the budgeted cost, the management can follow the same steps and adjust them accordingly.

7. Problem-Solving Strategies

Unfavorable variances are the differences between the budgeted and actual results that indicate a negative impact on the performance of an organization. They can occur due to various factors, such as changes in market conditions, inaccurate assumptions, operational inefficiencies, or external events. Addressing unfavorable variances is a crucial task for managers and decision-makers, as it can help them identify the root causes of the problems, take corrective actions, and improve the future outcomes. In this section, we will discuss some of the problem-solving strategies that can be used to address unfavorable variances from different perspectives, such as financial, operational, strategic, and ethical.

Some of the problem-solving strategies are:

1. Variance analysis: This is the process of comparing the budgeted and actual results, and calculating the variances for each line item or category. Variance analysis can help managers understand the magnitude and direction of the deviations, and whether they are favorable or unfavorable. Variance analysis can also be performed at different levels of detail, such as by product, department, region, or activity. For example, a manager can use variance analysis to compare the actual sales revenue and cost of goods sold for each product line, and determine which products are performing above or below the expectations.

2. Variance investigation: This is the process of finding out the reasons behind the variances, and evaluating their significance and controllability. Variance investigation can help managers pinpoint the sources of the problems, and assess their impact on the overall performance. Variance investigation can also involve collecting and analyzing relevant data, such as market trends, customer feedback, production reports, or quality audits. For example, a manager can use variance investigation to examine why the actual labor cost was higher than the budgeted amount, and whether it was due to higher wages, overtime, or low productivity.

3. Variance correction: This is the process of taking appropriate actions to correct the unfavorable variances, and prevent them from recurring. Variance correction can help managers improve the efficiency and effectiveness of the operations, and achieve the desired goals. Variance correction can also involve implementing changes, such as revising the budget, adjusting the prices, reducing the costs, or enhancing the quality. For example, a manager can use variance correction to lower the labor cost by hiring more skilled workers, providing training, or introducing incentives.

4. Variance reporting: This is the process of communicating the results of the variance analysis, investigation, and correction to the relevant stakeholders, such as senior management, investors, or regulators. Variance reporting can help managers demonstrate their accountability and transparency, and justify their decisions and actions. Variance reporting can also involve preparing and presenting financial statements, dashboards, or memos, that highlight the key variances and their implications. For example, a manager can use variance reporting to explain the reasons for the unfavorable sales variance, and the measures taken to increase the sales volume and market share.

8. Presenting Variance Analysis Reports

One of the most important aspects of variance analysis is communicating the findings to the relevant stakeholders. A variance analysis report is a document that summarizes the differences between the budgeted and actual results, explains the causes and implications of the variances, and provides recommendations for corrective actions. A well-written variance analysis report can help managers and decision-makers understand the performance of the business, identify the areas of improvement, and plan for the future. However, writing a variance analysis report can be challenging, as it requires a clear and concise presentation of complex and sometimes conflicting data. In this section, we will discuss some tips and best practices for writing effective variance analysis reports, such as:

1. Define the purpose and scope of the report. Before writing the report, you should have a clear idea of what you want to achieve and what you want to communicate. For example, do you want to report on the overall performance of the business, or focus on a specific department, project, or product? Do you want to compare the actual results with the budget, the previous period, or the industry benchmark? Do you want to highlight the positive or negative variances, or both? Having a clear purpose and scope will help you select the relevant data and metrics, and avoid unnecessary details.

2. Use a standard format and structure. A variance analysis report should follow a standard format and structure that makes it easy to read and understand. A typical variance analysis report consists of four main sections: an executive summary, a detailed analysis, a conclusion, and an appendix. The executive summary provides a brief overview of the main findings and recommendations, and is intended for busy readers who may not have time to read the whole report. The detailed analysis provides a comprehensive and in-depth explanation of the variances, their causes, and their impacts, and is supported by charts, tables, and graphs. The conclusion summarizes the key points and implications of the analysis, and provides suggestions for corrective actions and future plans. The appendix contains any additional information or data that may be useful for reference, such as assumptions, calculations, or sources.

3. Use clear and simple language. A variance analysis report should use clear and simple language that avoids jargon, acronyms, and technical terms that may confuse or alienate the readers. You should also use consistent and accurate terminology and definitions throughout the report, and explain any abbreviations or symbols that you use. For example, if you use the term "favorable variance" to refer to a positive difference between the actual and budgeted results, you should define what it means and use it consistently throughout the report. You should also avoid using vague or ambiguous words or phrases, such as "significant", "reasonable", or "as expected", and instead use precise and quantifiable terms, such as "10%", "5 million", or "within the range".

4. Use visual aids and examples. A variance analysis report should use visual aids and examples to illustrate and emphasize the key points and findings. Visual aids, such as charts, tables, and graphs, can help you present large amounts of data in a concise and attractive way, and make it easier for the readers to compare, contrast, and identify the trends and patterns. Examples, such as case studies, scenarios, or anecdotes, can help you demonstrate the real-world implications and consequences of the variances, and make the report more engaging and relatable. However, you should use visual aids and examples sparingly and strategically, and make sure they are relevant, accurate, and consistent with the text. You should also provide clear and descriptive titles, labels, and captions for the visual aids, and explain how they relate to the analysis.

5. Proofread and revise the report. A variance analysis report should be proofread and revised before submitting or presenting it to the intended audience. You should check the report for any errors or inconsistencies in spelling, grammar, punctuation, formatting, or data. You should also review the report for any gaps, contradictions, or redundancies in the content, logic, or argument. You should ask yourself questions such as: Does the report address the purpose and scope? Does the report provide sufficient and relevant evidence and explanation? Does the report present a clear and coherent message and recommendation? Does the report meet the expectations and needs of the audience? You may also seek feedback from a colleague, a supervisor, or an expert, and incorporate their suggestions and comments into the final version of the report.

9. Using Variance Analysis for Future Planning

One of the main benefits of variance analysis is that it can help you improve your future performance by identifying the causes of deviations from your budgeted goals and taking corrective actions. continuous improvement is a process of constantly monitoring, evaluating, and adjusting your plans and actions to achieve better results. In this section, we will discuss how you can use variance analysis for continuous improvement and future planning. We will cover the following topics:

1. How to use variance analysis to identify areas of improvement and set new targets.

2. How to use variance analysis to evaluate the effectiveness of your actions and strategies.

3. How to use variance analysis to communicate your progress and feedback to your stakeholders.

4. How to use variance analysis to anticipate and mitigate risks and uncertainties.

Let's look at each topic in more detail.

1. How to use variance analysis to identify areas of improvement and set new targets. Variance analysis can help you identify the strengths and weaknesses of your performance by comparing your actual results with your budgeted or expected results. You can use variance analysis to analyze different aspects of your performance, such as revenue, cost, profit, volume, price, efficiency, quality, and customer satisfaction. By doing so, you can find out which areas are performing well and which areas need improvement. For example, if you find out that your actual revenue is lower than your budgeted revenue, you can use variance analysis to determine whether the problem is due to lower sales volume, lower selling price, or both. Then, you can use this information to set new targets and plan actions to increase your revenue, such as launching a marketing campaign, offering discounts, or expanding your market share.

2. How to use variance analysis to evaluate the effectiveness of your actions and strategies. Variance analysis can help you measure the impact of your actions and strategies on your performance by comparing your actual results with your revised or updated budget. You can use variance analysis to assess whether your actions and strategies are achieving the desired outcomes and whether they are worth the cost and effort. For example, if you have implemented a cost-cutting program to reduce your expenses, you can use variance analysis to compare your actual cost with your revised budget and see how much you have saved and whether the savings have affected your quality or customer satisfaction. Then, you can use this information to decide whether to continue, modify, or terminate your cost-cutting program.

3. How to use variance analysis to communicate your progress and feedback to your stakeholders. Variance analysis can help you communicate your progress and feedback to your stakeholders, such as your managers, employees, investors, customers, and suppliers. You can use variance analysis to report your performance, explain the reasons for your variances, and justify your actions and strategies. By doing so, you can increase your transparency, accountability, and credibility. For example, if you have achieved a higher profit than your budgeted profit, you can use variance analysis to show your stakeholders how you have increased your revenue and reduced your cost and how you have used your profit to invest in your growth and development. Then, you can use this information to gain their trust, support, and recognition.

4. How to use variance analysis to anticipate and mitigate risks and uncertainties. Variance analysis can help you anticipate and mitigate risks and uncertainties that may affect your future performance by analyzing the trends and patterns of your variances and forecasting your future results. You can use variance analysis to identify potential opportunities and threats and plan actions to exploit or avoid them. For example, if you notice that your actual sales volume is increasing faster than your budgeted sales volume, you can use variance analysis to project your future sales volume and see if you have enough capacity, inventory, and resources to meet the demand. Then, you can use this information to prepare for the increased demand, such as hiring more staff, ordering more materials, or upgrading your equipment.

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