We all do reports with variance analysis. What do you find as the disadvantage of this type of financial analysis?
Variance analysis - disadvantages
Answers
I think the main disadvantage is that people tend to focus on the largest negative deviations i.e. explain underperformance. However, in my book variance analysis is the starting point for all performance
Then you can to the discussion variance to what but that's a whole different animal.
I think the disadvantage may be in a few areas;
1- focus on past without looking at the future. i.e. so how does past performance affect our targets (future) and what are we going to do now/change to act on that analysis?
2-not understanding the drivers behind the performance. I.e. what I call an "ivory tower" financial analysis where the analyst is not clued into the
I agree with Anders that ignoring positive performances may be short sighted.
When looking at the difference between estimated cost and actual cost or reconciling the differences in net operating income under variable costing and absorption costing, I'm a big fan of studying the positive variance as it may relate to the future... where possibly unexpected gains were made and why and how that can be leveraged.
Too often variance analysis becomes a backward looking exercise in "wish I had a crystal ball back then" as we ponder various negative variables and their outcomes. I agree with Anders and Len on the value of looking forward and what is actually useful. I believe that as a starting point for asking questions as the answers may relate to the future, the advantages of variance analysis can outweigh the disadvantages, but only if the conscious choice is to pragmatically focus on the future and apply the data learned.
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