Vinu: Manu, budgets are prepared every year, but where does variance analysis fit in?

Manu: Variance analysis is the control mechanism, Vinu. It compares budgeted vs actual performance and highlights where things are going off track.

Vinu: What’s the first step in doing variance analysis?

Manu: Start with revenue variance. If budgeted sales were ₹10 crore but actual sales are ₹8.5 crore, there’s a ₹1.5 crore negative variance. The question is—volume drop or pricing issue?

Manu: Break costs into components. For example, if raw material was budgeted at ₹5 crore but actual is ₹5.8 crore, that ₹80 lakh variance needs analysis—price increase or wastage?

Manu: No. Focus on material variances. A ₹2–3 lakh deviation may be normal, but ₹50 lakh or more needs immediate attention.

Vinu: How frequently should this be done?

Manu: Monthly, without fail. A delay of even one month can compound errors and impact profitability.

Vinu: How does this help decision-making?

Manu: It enables timely correction. If overheads exceed budget by ₹30 lakh, management can cut discretionary expenses or renegotiate contracts.

Vinu: What about positive variances?

Manu: Analyze them too. If profit is higher by ₹40 lakh, check if it’s sustainable or due to one-time gains.

Vinu: What’s a common mistake executives make here?

Manu: Treating variance analysis as a reporting exercise. It should trigger action, not just explanation.

Vinu: Final takeaway?

Manu: Variance analysis is about control and correction.

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