Learn: Using Variances to Improve Performance

Welcome!Building on what you've already learned about budget variances and analysing outcomes, this lesson focuses on how businesses use variances to improve performance. Understanding this will help you see how variances influence decision-making and drive success.

What are Variances?A variance is the difference between the budgeted amount and the actual amount. It can be either favourable (better-than-expected) or adverse (worse-than-expected). Variances are important because they highlight areas where performance exceeded or fell short of expectations.

Why Use Variances?Businesses use variances to identify areas for improvement, control costs, and allocate resources effectively. By analysing variances, managers can pinpoint specific issues, such as overspending or underperformance in sales, and take corrective action.

Using Variances to Identify ProblemsAdverse variances signal potential problems. For example, higher costs might indicate inefficiency, while lower sales may show weak demand. Analysing these variances helps managers find solutions, such as reducing waste or improving marketing strategies.

Corrective ActionsOnce variances are identified, managers take corrective actions. For example, cutting unnecessary expenses to address adverse cost variances or revising sales strategies to improve revenue performance.

Review Time!Great work! You've learned how businesses use variances to identify issues and improve performance. Let's test your understanding with a few questions.

Final ThoughtUsing variances is essential for improving business performance. By identifying problems and taking corrective actions, businesses can achieve better outcomes and meet their goals.