This Presentation explains about variance, types of variance and importance of variance in an organization

1. Variance
Shekhar Jyoti Das
PGDM-ABPM-2017-35

2. What is Variance?
• Difference between an expected and actual
result such as between a budget and actual
expenditure.

3. HOW TO FIND OUT VARIANCE?????You should now be aware that the following cycle should take place:
Set budget amount
Compare budget amounts with actual amounts
Calculate total variance
Analyse total variance
Explain reasons for variance
Take action

4. Variance analysis
• Variance analysis, in budgeting is a tool of
budgetary control
• Assists in evaluating performance by means of
variances between budgeted amount and the
actual amount incurred/sold.
• Variance analysis can be carried out for both
costs and revenues

5. Variances – The Golden Rules
To calculate £ variance = A - B
To calculate the % variance = A – B X 100
B
Where A = Actual figure
B = Comparative figure
(Budget, Previous, Corresponding)

6. InterpretationofVariances
Favourable variances mean that the actual performance of
the organisation has been better than expected
– likely to increaseprofit
Favourable
(Good business)

7. Adverse variances mean that the actual performance
has been worse thanexpected
-likely to reduceprofit
Adverse
(Bad for business)
InterpretationofVariances

8. Variances
Adverse or Favourable?
Adverse/Favourable results depend on
the variance being considered
Budget Actual Variance
£120,000 £125,000 £5,000
Budget Actual Variance
£120,000 £125,000 £5,000
Costs
Income

9. Types of Variances

10. ProfitVariance
 The difference between budgeted profit and
actual profit
 This can be broken down to revenue variances
and costvariances
 These variances can in turn be broken down
further

11. SalesVariance
Sales variance – Difference between actual
sales revenue and budgetedsales revenue
This can be broken downinto:-
-Sales volume variance (how sales differedfrom target)
Price variance (how actual price differedfrom
expected price)

12. CostVariances
Material price variance –Difference between the
budgeted cost of raw materials and the actual costs
Material usage variance – Difference between the
budgeted quantities of raw materials & supplies against
the actual quantitiesused
Labour rate variance – the budgeted wage bill compared to
the actual wagebill
Labour efficiency variance – the budgeted number of
man-hours to complete tasks compared to the actual
time taken

13. Causes of Variances
Direct Materials
Direct
Labour
Fixed
Overheads
Sales
Revenue
Quality
Wastage
Cost
Theft
Specification
change
Pay rise
Poor supervision
Skill level
Machines
-Breakdown
-Increase speed
–Decrease speed
Inflation
Supplier
change
Stepped
cost
Price
increase or
decrease
Volume sold

14. Use of variance analysis in Business
• Budget vs. Actual Costs
40,000
20,000
0
60,000
80,000
140,000
120,000
100,000
2011 2012
budgeted cost
actual cost

15. Use of variance analysis in Business
• Forecasting
– It uses patterns of past business data to construct
a theory about future performance
– Being able to mathematically forecast sales helps
understanding demand

16. Use of variance analysis in Business
• Sensibility in competition
-Variance of different metrics in a market helps
building products more sensibly
-analysis of variance in market monitoring indicates
key differences which helps towards achieving
competitive advantage

17. THANK YOU
Q & A