Variance reports also known as departmental or monthly operating reports are financial analysis results which are used to show the difference in amount between actual financial outcomes and the planned financial results. The report analyses the actual values versus the budgetary values. The differences between the budgeted amounts and the actual amounts constitute the variances. The variance values are usually enumerated in terms of monetary value and as well as in terms of percentage variance from the actual in order to show the percentage difference from the original. The conversion of variances into percentages is useful because it helps depict the relative size of the variance (Bragg, 2010).
The calculation of the percentage variance happens through the division of the variance in dollars by the budget amount and not the actual amount. After the budget has been established the major financial activity for the operations manager is to offer explanations for variances between the recorded performance and the budget. It so happens that many at times things do not work out in an exact manner as outlined in the budget. It is a basic requirement for most organizations to ask managers to make reviews of the budget and offer explanations for variances within the variance report (McConnell & Liebler, 2004).
The variance report should be created from the general ledger system and contain rows of expenses, revenues and statistics. The titles to various budgetary items should be listed on the left most column or the middle section of the report. The top most row contains the titles of the columns which include actual results, the variance values, the variance percentage and at times values from the previous year may be included whenever a review from the previous year is sought (McConnell & Liebler, 2004). The inclusion of values from previous years helps to make year-to-year comparisons. The variance report’s body is supposed to contain the actual values associated with each row and column title. For example a supplies line may appear as follows:
Actual_____ Budget _____Variance ______ Percent
As an example this would indicate that even through a thousand dollars were budgeted for only eight hundred dollars went to the actual expenditure and this left a variance of 200 dollars, which is an equivalent of 20% percent variance. The obtained variances shall be obtained through the division of the variance by the budget and not the actual amount. When there is left over money the variance will termed as favorable or positive, this is because its better to spend less than the budget dictates. The opposite is referred to as the unfavorable or negative variance (Bragg, 2010).
The preparation of this report should also have an explanation that accompanies the obtained variances in order to offer vivid explanations as to why the variances occurred. The explanations are a basic requirement for the administration. Reporting thresholds may differ but they often consist of percent and variance value combinations. Typical levels on thresholds are 10% for percentages and $5000 for monetary values. However, this will differ depending on the department size. Considering this threshold level means that the above values on supply may be neglected. This consideration eliminates the need to do unnecessary work identifying minor variances.
The requirements of some companies state that only negative variances may be reported. Traditional variance analysis usually compares actual amounts at the class level to forecast or budget with a column which shows the percentage or dollar variance for the months or years under highlight (Bragg, 2010). The not so traditional variance analysis approach does not make comparisons of rates, actual amounts, rates and units at the line item level to forecast or budget with columns that calculate variances for all the three data types. The causal analysis occurs where plan line and actual items include rate and units as well as the dollar value. A causal analysis variance may also be calculated. This type of variance shows how much of the variance of the dollars is as a result of lower or higher units (shows the volume impact) or that which is due to a lower or higher cost or price (shows the rate impact).
Bragg, M. S. (2010),. Accounting Best Practices, 6th edition, John Wiley and Sons
McConnell, R. C. and Liebler, G. J. (2004),.Management principles for health professionals, 4th edition, Jones & Bartlett Learning