- Determine if a variance is significant
How do we know if a variance is significant? Looking at history can be a good start. Let’s take a look at some examples and review variance analysis:
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Now back to our old standby. What if Simply Yoga had the following information available to you?
- 2010: Sales $7000, wages $3500
- 2011: Sales $7000, wages $3400
- 2012: Sales $7000, wages $3600
- 2013: Sales $7000, wages $5000
What do you notice? Would you consider the wage variances between 2010 and 2012 to be significant? What about 2013? With stable sales, each variance would need to be examined to insure that payroll was prepared correctly, but the variance in 2013 when comparing wages year to year is significant. This could happen if there was a teacher shortage, and a higher wage was needed to get enough staff. Can you think of any other reasons that a wage difference this significant might happen?
Let’s look at another example with our old friends at Hupana Running Company:
Hupana Running Company’s direct labor information is as follows:
|Year||Direct Labor Budgeted||Direct Labor Actual|
Which years would you not worry about from a variance perspective and which would be of concern?
When we look at various years, we can see that small variances happen. It might relate to unanticipated overtime in the case of small unfavorable variances or a particularly quick worker in the case of small favorable variances. But look at 2012. This is a variance that needs to be investigated. Maybe there was a machine breakdown that left employees standing around for a week, or perhaps high turnover led to a period of time needed to train new employees, thus slowing production.
What is another answer for the higher labor in 2012? We don’t see a very important number that could help answer this question: sales. What if we had a banner year, and sales were through the roof? Then this variance makes perfect sense.
Whatever the case, it is important to look at history and determine if a variance is significant or a normal variance.