Calculating variances and producing a variance analysis report is one of the major tasks of management accounting. This post will show how such a report can be designed to be most effective for its receiver. Check our previous posts, if you are looking for variance analysis formulas or the benefits of variance analysis.
Why designing is important
Before exploring the different aspects that make variance analysis reports good in quality, it is essential to understand their importance. Producing such a report may be a standard task for a management accounting, however, the result of it can be of major impact. If a manager receives the report, he or she will base decisions on it. Imagine a document states a certain profit centre returns an unexpected loss instead of a profit. This could cause the manager to start cost cutting.
Another factor to consider is the limited time available for management to deal with the report. It is, therefore, possible that crucial information is missed and wrong consequences are taken. Management accounting needs to make sure this doesn’t happen.
Designing a variance analysis report
State plan and state actual
The first point sounds obvious: The report should state the desired / planned value as well as the actual value of each account or category. Although the document is called variance analysis report, it is of great value to show the two figures which finally lead to the calculated value.
I have seen reports stating more than one planned values for each account. Take care when doing this. You may see this as an advantage because you provide more information but it can lead to confusion. I recommend sticking to one planned value.
A quite neat option is to provide “year to date” and “monthly” columns but using the same underlying planning version. Here an example with “budget” being the underlying plan.
Show difference absolute and in %
As a management accountant one of your aims should be producing a reader-friendly report. Showing the variance in absolute terms and in % provides a good set of information but still leaves the report in a compact format. Check the example from above. For example, the current month product x sales are $ 41’000 compared to a budget of $ 40’000 what results in a variance of $ 1’000 or 3 %.
Showing the variance in % allows the reader to interpret the differences in another way. Someone may say, a variance of 5 % can just happen due to planning inaccuracy and thus is only interested in higher deviations. It furthermore allows the management accountant who is producing the report to quickly gather major differences.
When producing a report you should always ask yourself who the main receiver will be. It then should be your aim to produce a report in an adequate granularity. Let’s look at an example. A product manager of product x may be interested seeing each little account which was used to generate his or her product x. The head of all products, on the other hand, is primarily interested in seeing whether the overall production cost is in line with the plan.
I recommend determining the best granularity in a 1:1 meeting with the receiver and then continuously producing the report as discussed.
Use colours for deviation or graphs
A nice way of giving your variation analysis report the extra nudge is by colouring the variances according to their significance. You could use conditional formatting in excel to make this a quick step. Using colours allows you to draw attention (and this can be very limited as described before) on certain accounts which perform well or bad.
Another option is to use graphs. Some managers prefer visualisation over pure figures. This choice is more likely to be used when producing a dashboard or if your report focused on only some accounts. Alternatively, when having many different accounts, it can be applied to the total values only. For example, there are 5 different costs but only total cost is represented in a graph.
Use comments to give insight
After following all the steps before, you produced a variance analysis report. Now it is time to add extra value to it by commenting on core deviations. Use your understanding of the business to produce this kind of useful insight. If variances can’t be explained, the management accountant should analyse accounts in depth or ask people from operations.
In situations where I can’t explain results and can’t get a quick feedback from operations, I personally like to comment “deep dive ongoing”. This gives me time to analyse the issue after sending out the report and also lets the receiver know that examination is in progress. In some cases, you even get possible explanations from the report receiver.
This article highlighted five points that should be considered by management accountants when designing a variance analysis report. Its design is essential in order to maximise its effect on management. Following you find a possible extract of such a report: