Saturday, November 14, 2015

When is a Variance Analysis Needed?

If we know that a variance is the result of an uncontrollable price increase for a supply item that we must have, do we need to investigate and make a report regarding the variance? Why or why not?

I’m not sure if this question is fully packed. What matters in looking at the variance is not just that a variance occurred, but also the size of the variance. We can look at a variance as just an absolute dollar amount or as a percentage of budget. If he variance of the line item surpasses either of those thresholds in terms of the company’s policy , then I would say of course a variance report should be prepared. This variance report would be able to unpack the other issue with the question. It says we know that a variance is the result in the price increase – but do we know that this is the sole driver of the variance, or do we know that the price went up so we spent more? A variance analysis can find other underlying trends that just knowing that there is a correlation between the variance and the price of the supplies. This can let us look at perhaps other vendors of the needed item or perhaps a renegotiation of the terms with our current supplier.