• competent operating managers adopt continuous improvement or kaizen mentality; don't assum optimal performance is being "on budget"
• monthly analysis of differences between actual and budgeted revenues and expenses for each business unit and the whole organization

• identify key causal factors that affect profits
• break down overall profit variances by these key causal factors
• try to calculate specific, impact of each causal factor by varying on that factor while holding all others constant (spin one dial at a time)
• add complexity sequentially, one layer at a time, beginning at basic level (peel the onion)
• stop process when added complexity is not justified by added useful insights into causal factors

• selling price variance
• mix and volume variance
• mix variance
• volume variance
• other revenue analysis: market penetration and industry volume

• usually not separated
• (actual volume - budgeted volume ) x budgeted unit contribution
• volume variance results from selling more units than budgeted
• mix variance results from selling a different proportion of products from that assumed in the budget
• because producst earn different contributions per unit, sale of different proportions of products will result in a variance

[total actual volume of sales x Budgeted percentage - budgeted sales] x Budgeted Unit contribution

subtract mix variance from combined mix and volume variance

• separate mix and volume ariance into amount caused by differences in market share and amount caused by differences in industry volume
• business unit manager sare responsible for market share, but aren't responsible for industry volume
• market share variance = [actual sales - industry volume] x Budgeted market penetration x Budgeted unit contribution
• industry volume variance = (actual industry volume - Budgeted industry volume) x Budgeted market penetration x Budgeted unit contribution

• Fixed costs
• variable costs

• variance between actual and budgeted fixed costs are obtained by subtracting since these costs are not affected by volume of sales or volume of production

• vary directly and proportionately with volume
• budgeted variable manufacturing costs may be adjusted to actual volume of production
• volume used to adjust budgeted variable manufacturing expense is manufacturing volume not sales volume which was used in finding revenue variances.

• year to date
• compare budget for whole year with current estimate of actual performance for the year

• predetermined standards or budgets
• historical standards
• external standards

• if carefully prepared and coordinated, these are excellent standards
• they are the basis against which actual performance is compared in many companies
• if budgeted numbers are collected in a haphazard manner, they won't provide a basis for comparison

• records of past actual performance
• results from the current month may be compared with results for last month or with results from the same month a year ago

• conditions may have changed between two periods in a way that invalidates the comparison
• prior period's performance may not have been acceptable.

• standards derived from performance of other responsibility centers or of other companies in the same industry
• performance of one branch sales office may be compared with the performance of other branch sales
• some companies identify the company they believe to be best managed and use numbers from that company to compare - benchmarking

• variance between actual and standard performance is meaningful only if it is derived from a valid standard
• although it's convenient to refer to favorable and unfavorable variances, these words imply that standard is a reliable measure of waht performance should have been

• standard wasn't set properly
• although it was set properly in light of conditions existing at the time, changed conditions have made standard obsolete

• if a company uses a full-cost system, both variable and fixed overhead costs are included in inventor at standard cost/unit.
• if ending inventoy is higher than beginning inventory, some of the fixed overhead costs incurred in the period remain in inventory rather than flowing through cost of sales
• coversely if inventory balance decreased during period, more fixed overhead costs were released to cost of sales than amount actually increased in the period.

• favorable variance in engineered costs is usually an indication of good performance; lower the cost = better the performance
• performance of discretionary expense center is usually judged to be satisfactory if actual expenses are about equal to budgeted expenses, neither is higher or lower (if you budgeted $1M then they want you to spend $1M)

• although variances identify where a variance occurs, it doesn't tel why the variance ocurred or what is being done about it
• decide whether a variance is significant
• as performance reports become more highly aggregated, offsetting variances might mislead the reader
• as variances become more highly aggregated, managers become more dependent on accompanying explanations
• reports show only what has happened, they don't show future effects of actions manager has taken
• variances only measure what you set standards for (doesn't measure morale)

• inreased effort
• formal publication is more accurate than informal feedback
• basis for analysis because informaiton from informal sources is general and imprecise
• generate conversation for reasons for variances
• confirm or cast doubts on information received from informal sources.