When dealing with profitability, every company has to make a good decision. It is quite critical for manager to use the variance analysis tools properly. By using variance, managers can make adjustment on their company performance in order to achieve the highest profit. Variance is actually a difference between actual and what planned. What we plan is also called budgeted. Variances analysis is so important when there are a planning and controlling management. They help managers in sketching their strategies properly. To be more precise, mangers can focus on some specific areas that are not operating as expected and they can make an adjustment to fix the problems. Consider ingredients costs at a restaurant, if actual costs are higher than expected, the variance analysis will allow the managers to find the reasons and take early corrective decision. Thereby, the manager can ensure that the operations later on may result in fewer ingredients. Furthermore, the Five-step decision-making would be more effective when applied the variance analysis. In another word, it provides fully information for managers to evaluate the current performance.
Then, the managers can make a decision to ensure it works correctly and the budgeted plans are attained as planned. Variance analysis not only helps the managers fix the poor performance but it also enable managers to predict the future outcome. Thereby, they can improve their profitability on next sale. It is good to know why the variance analysis must be applied but the most important thing is how the analysis can be conducted. To conduct the analysis correctly and make decision appropriately, managers need to know how to make a budget. Simply, the managers have to identify the expenses will be used and estimate the amount of money will be spent on those expense.
Next, the actual costs will be keeping tracked and compared with the budget. Lately, the decision will be made based on the variances. One thing to remember that variances can have multiple causes. The decision made in one part can fix the cause of another part. Consider having unfavorable direct material efficiency. There is many possible things cause this problem such as: having cheap material, using under skilled labors or low quality machine. The other stage in conducting variance analysis is investigating variance. It would be an ideal to have actual costs equal budgeted costs, but operating is not always perfects as planned.