Variance analysis is a powerful tool for project, and financial, management. It measures the differences (variances) between the expected and actual results of a project. It is a technique that provides comparisons between budget and actual costs, direct material used and actual material used, and planned and actual hours used. Knowing these differences helps to control and improve the performance of a project or process.
The flow of events in variance analysis generally includes:
- Identifying questions to be answered
- Preparing a standard cost/performance report
- Analyzing the variances between the performance and the standards
- Taking corrective action
The following is not part of the flow of events in variance analysis: Working to ensure that all variances are favorable.
Working to ensure that all variances are favorable would be counterproductive to the goal of variance analysis. Variance analysis is intended to identify areas where improvement can be made, and trying to ensure favorable variances would defeat the purpose.
Instead, the goal of variance analysis should be to identify variances between expected and actual performance and, if possible, identify the cause of the variance. This allows for corrective action and improvement that will result in more favorable variances in the future.
This article was last updated on 2023-05-28.