Have you followed a recipe only to end up with a dish that’s somewhat different from what you expected?
The same thing can happen to companies. They can follow a well-thought-out roadmap, but the actual results might differ significantly from what was forecasted. Variance analysis helps businesses detect and understand these discrepancies. This, in turn, enables them to pinpoint areas of under or overperformance and adjust their strategies to improve outcomes.
But what if you weren’t the only one trying to make that specific dish? In this case, you might want to see how your finished dish measures up to those made by other people. You could compare it in terms of taste, flavor, presentation, or other aspects.
Similarly, competitive benchmarking allows companies to do just this. It involves comparing their performance metrics to those of competitors, which allows them to detect opportunities for improvement.
In this article, we’ll explore what variance analysis and competitive benchmarking are on a deeper level.
Strategic variance analysis is a tool that measures the difference between the actual and forecasted financial performance. For example, a business may compare its sales revenue to what was initially predicted for a specific period.
Performing variance analysis can help paint a clearer picture of the areas where a company is over or underperforming. This allows the business to adapt its strategies accordingly.
Companies can conduct different types of variable analyses based on the kind of data they want to compare.
Some of the most commonly conducted types of variance analysis are as follows.
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This variance arises when the actual labor cost differs from the expected budget or standard amount. Labor costs can go beyond basic salaries or wages to include bonuses, benefits, commissions, payroll taxes, or other employee-related costs.
If a company spends more than expected or budgeted, it can investigate the possible causes. For instance, the actual hours of labor might be longer per product produced, or the total salary for employees may be more expensive than predicted.
If the labor variance is unfavorable, companies can put on their thinking caps and explore various strategies to reduce labor costs. For example, they can ensure all their equipment functions well or implement proper training sessions for staff to ensure they’re well-equipped to handle their roles.
Material variance refers to discrepancies between the actual cost of direct materials and their budgeted or standard costs.
This calculation typically considers the costs of acquiring the direct materials and the quantity or volume of materials used to produce a specific number of products.
Overhead variance represents the difference between a business’s actual and predicted overhead. Overhead expenses refer to the costs of operating a business.
There are two main types of overhead variances: fixed overhead variance and variable overhead variance.
Fixed overheads don’t change at different production levels. An example would include the mortgage or rental paid. On the other hand, variable overheads will change when the level of production or services offered shifts. For instance, the cost of raw materials is considered a variable overhead.
Budget variance represents the difference between the company’s actual financial performance and what was predicted. It gives insight into whether the company is staying on track financially or deviating from its planned trajectory.
For example, an unfavorable budget variance might indicate that the business’s expenses are greater than expected or the revenue generated is lower than predicted.
Budget variances can be caused by various factors. For instance, the rising costs of raw material can increase expenses, or changes in laws or regulations may lead to extra compliance costs. New competitors can also reduce market share and revenue, leading to unfavorable budget variances.
Variance analysis in accounting helps companies stay up-to-date with their financial performance. These analyses not only focus on what went wrong but can also highlight what went right, giving businesses a comprehensive view of their strengths and weaknesses.
At the same time, businesses can use a business driver tree to investigate the causes behind these variances. A driver tree is a simple yet powerful visual tool that maps out how different factors contribute to a larger goal, like profits or return on investment. It helps identify the root causes behind variances revealed during variance analysis.
By combining both, companies can better understand where they’re excelling, where they’re falling short, and, most importantly, why they're getting these results. This allows companies to refine and adapt their strategies to boost their financial performance.
After digging deeper into the causes of variances and assessing how much they can be controlled or changed, companies can assign responsibilities to the right departments to improve performance in those areas.
Competitive benchmarking helps you assess how your business compares to competitors. It is essential to conduct competitive benchmarking to get a clearer picture of where you stand in the market.
This process involves analyzing and comparing specific metrics between you and your competitors. By analyzing these trends over time, you can see how you compare to others and spot areas where your competitors are outperforming you.
Competitive benchmarking is often confused with competitive analysis.
Competitive analysis is a detailed study of your key competitors and their business operations. This process involves examining different areas, like their marketing strategies, pricing models, strengths, and weaknesses. The goal is to spot opportunities to improve your business to match or surpass their performance.
On the other hand, competitive benchmarking involves comparing data trends between you and your competitors over a period of time. While you might not get in-depth insights into a competitor’s strategies, you can measure how you stack up against others in the market.
These two analysis techniques play unique yet important roles in helping you understand your competition.
Competitive benchmarking can help you measure and compare metrics in different areas.
Some examples of metrics used in competitive benchmarking are as follows:
- Website traffic
- Social media followers and engagement
- Online reviews and customer satisfaction
- Product cost and quality
- Revenue and profits
- Market share
Some data sets can be more difficult or expensive to obtain, while others are easier to access or cost little to nothing.
To get the most out of your competitive benchmarking process, focus on the metrics that will bring real value to your business and are feasible to collect with your current resources. This will give you a better idea of which metrics to include so that you can gain actionable insights without stretching yourself thin.
Strategic variance analysis and competitive benchmarking are powerful tools to help your business stay ahead of the curve. However, without the right techniques or knowledge, it’s easy to overlook key insights or be misled by misinterpretations, which can impact your company’s financial performance.
If you want to learn to use these analysis techniques accurately and effectively, we’ve got you covered.
- The differences between effective and ineffective variance analysis
- The process for conducting driver tree analysis
- The process of competitive benchmarking
Throughout
the course, you’ll gain experience through hands-on exercises, ensuring you can apply what you’ve learned to real-world situations.
The best part? You can complete the course from the comfort of your home and at your own pace, making learning flexible and convenient. Plus, upon completion, you’ll earn CPE credits and an official NASBA-approved Certificate of Completion.
There’s no better or more accessible way to master these key concepts that will help you drive smarter, data-backed decisions.
Nathan Liao, CMA
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Nathan Liao, a Certified Management Accountant, educator, and influential business figure in the accounting industry, has dedicated over a decade to supporting more than 82,000 accounting and finance professionals in their pursuit of the CMA certification. As the visionary founder of CMA Exam Academy and CPE Flow, Nathan is committed to delivering premier online training solutions for the next generation of accounting and finance professionals.
