You show variances, so that’s a good start. For example, you might be showing variances in your manufacturing cost versus the budget.

However, there’s a more powerful way to go about it that drills down even deeper.

Break you manufacturing or service variances down into three different parts:

1. Volume. Here’s the variance that is related the volume of your work. As you have more volume come in, in theory you can be spreading some of your fixed cost and picking up some positive variances from that standpoint.

2. Efficiency. How efficient were you in producing the product or delivering the service versus what your standards were or what you had expected for that particular level?

3. Purchasing. This would cover how efficient were your rates. What were the commodity prices on your raw material, what were the hourly rates on your labor, higher or lower than what you had anticipated?

By breaking down your variances among these three factors, you get a much deeper look at how you really did. Sometimes you might find that the variances actually don’t all go in one direction. For example, you might have been very efficient on the particular jobs that you had to work, and you had lower than expected labor rates, however you might have done less overall volume so therefore you had some negative volume variances.

Breaking down variances in this form can be very powerful because it really clues you in on where you need to focus. It could be certainly one of those three areas:

1. Purchasing. Are your costs running to high per unit, so that you need to get better at your sourcing to get your unit costs down to standard?

2. Efficiency. Do you have to work at being more efficient at how you deliver the service or produce your product?

3. Volume. Do you just plain and simple need more volume in your company in order to help drive down your overall costs per unit produced or hour of service?

So, congratulations if you’re showing some variances; that is a great first step.
But, go a level deeper, break it down into the three components and you’ll be even further on your way to becoming a stronger company.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value