Steps of Cost Variance Analysis

Learning Outcome

• Identify the four steps of simple cost variance analysis

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! Classes taken Number of classes offered 500 500 20 50$7,000 $7,000$3,500 $4,200$250 $300$500 $800$500 $500$100 $100$250 $300$5,100 $6,200$1,900 $800 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!