BUSMGT713 Chap.5 Explaining variances and responsibility for results
Explaining variances and responsibility for results
The second half of Week 2, budgeting and cost control, turns variance numbers into explanations and decisions. The budgeting and responsibility workshop warns that a favourable variance does not prove good performance, because it still marks a departure from plan, so every sizeable variance is a reason to investigate. The same workshop asks who is responsible for a result and answers that control is often partial.
This chapter builds both skills on one case. At Tōtara Joinery a five-day breakdown of the router that cuts every tabletop produces five flexed variances: an emergency repair, an overtime premium, outsourced cutting, a delivery discount and a favourable power line that exists only because the machine stood idle.
A responsibility matrix separates the manager who controls each line from the departments whose problems influenced it, and a model memo to the operations director assigns each variance and proposes one investigation. Two practice cases then test favourable results that collapse under a flexed comparison or a missing invoice.
What this chapter covers
- 01
Why a favourable variance is not automatically good news
- 02
Tracing several variances back to one operational event
- 03
Separating control from influence in a responsibility report
- 04
Writing a short memo that assigns each variance to an owner
- 05
Favourable results that come from comparing with the original budget
- 06
Timing gaps when a cost has not yet been recorded
Worked example · free
Tōtara Joinery: what one router breakdown cost in May
- +1Adverse variances total $3,200 plus $5,400 plus $2,600 plus $1,800 = $13,000 A.
- +2Net effect = $13,000 A less $900 F = $12,100 A on profit for the month.
- +1The $900 F arises because the router was switched off while broken, not because power was used more carefully.
- +1So the favourable line is a symptom of the same failure as the adverse ones and earns no credit; the breakdown itself is what needs investigating.
Key terms
- Controllable cost
- Spending that a named manager can directly change through their own decisions within the period.
- Responsibility report
- A performance statement listing the variances each manager is held accountable for.
- Variance investigation
- Following up a significant variance to find its cause before acting on it, whatever its direction.
- Root cause
- The single underlying decision or event from which several linked variances arise.
- Overtime premium
- Extra pay above the normal hourly rate for hours worked beyond the standard roster.
Explaining variances and responsibility for results FAQ
Why can a favourable variance be bad news?
A favourable figure only says the period differed from plan. It may come from a target that was easy to beat, from comparing with a budget that was not flexed, from a cost not yet recorded, or from a failure such as an idle machine using less power. The course treats favourable and adverse variances alike as prompts for investigation.
How do I explain several variances in a test answer?
Give each variance a specific cause in one clause, then look for an event or decision that links several of them, such as a breakdown or a change of supplier. State the net effect in dollars and end with one recommendation or investigation. Avoid restating that a cost went up; say why it went up and who controls it.
What is budget slack?
Slack is a target set below what the team can realistically achieve, often because the people being measured helped set it. Results then beat budget every period without any real improvement. Repeated large favourable sales or cost variances from the same team are the usual warning sign.
Is a production manager responsible for every production variance?
Only partly. A production manager controls labour effort and how materials and machines are used, but problems that start elsewhere, such as a breakdown that maintenance failed to prevent or tight delivery dates promised by sales, land in production's figures. A fair report shows who controls each line and who influenced it.
How long should a written variance explanation be?
As long as the question allows and no longer. The practice mid-term caps its variance explanation at 200 words, which is enough for a cause per variance, one link between them and a recommendation. Plan the points before writing so the limit is not spent on repeating the figures.
Assessment move
Take any variance table from Chapter 4 and, before writing, list each line with its F or A label and one possible cause. Draw arrows from a single starting event to the lines it could explain and net them in dollars. Next, build a small responsibility matrix: rows for the variances, columns for the managers, marking control and influence separately.
Then write a memo of under 150 words that states the net effect, gives each variance one owner and proposes one investigation. Finally, test every favourable line twice: against the flexed allowance and for costs not yet recorded. Repeat with a case where an adverse line is the root of favourable ones.
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