As sales manager, you submitted your expense report, which was 20 percent more than budgeted. As you review your report, you note for your supervisor that you went on 100 sales calls rather than 75 as were originally budgeted. As you further investigate the difference, you notice that your mileage was budgeted at 1000 miles, but you actually ended up driving 1500 miles. While doing this analysis you see that although you completed more sales calls, you may have been more efficient with setting up your schedule to reduce the mileage driven. This would have saved a substantial amount for your company and gotten you much closer to your budgeted amount. As you put together this analysis, you include a note with your expense report, letting your supervisor know your plan to get your costs more in line with your next expense report! Did you properly take all four steps in the process? Will this help to improve your ability to meet your budget going forward?

So cost variance analysis will help us to understand how well our costs were controlled compared to our budgeted numbers. There are four steps involved in this process:

1. Calculate the difference between what we spent and what we budgeted to spend.
2. Investigate why there is a difference.
3. Put the information together and talk to management.
4. Put together a plan to get costs more in line with the budget.

Let’s start with calculating the difference. In our Simply Yoga example, our planned number of classes taken was 500. In reality, we had 600 people through the doors. Our labor was higher than budgeted, by $700, which was considered an unfavorable variance. What happens when we investigate that difference?

Some examples may be helpful as you begin to navigate variance analysis:

Our revenue was higher, due to more classes taken, so the additional revenue more than offset the addition to our labor. When we put that information together to offer to management, how would you proceed? In this case, we really just need to let them know, that we had more classes than we budgeted, so it makes sense and we really don’t need to do anything, right?

But what about when the classes taken remained stable? We were offering more class opportunities, but had the same number of students through our door. So now how do we put the information together? Here is the information again, so we can figure out our strategy!

Let’s walk through the four steps.

1. The difference in wages from what we budgeted to spend ($3,500) and what we spent ($4,200) is $700.
2. This difference occurred, because we ended up offering 50 class opportunities, rather than the 20 we had budgeted, but fewer people attended each class. Because of our $84 per class minimum wage per class, our wages were higher, but our revenue remained the same.
3. We put together the information for management, and let them know that we offered more classes than were budgeted, but did not increase participation. We just had fewer people in each class.
4. How could we fix this? We could take classes off the schedule, intending to funnel more people into each class offered. We could also remove the $84 per class minimum wage per class, and simply pay the instructors $7 per participant. So an instructor could only be compensated $14 for a class if only two students showed up.

What route might you take in this example? Fewer class opportunities could backfire and you may have fewer students overall. But changing the compensation plan may lower morale among the instructors. These can be tough choices!