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10.16: Significant Variance

  • Page ID
    45933
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    Learning Outcomes

    • Determine if a variance is significant

    How do we know if a variance is significant? Looking at history can be a good start. Let’s take a look at some examples and review variance analysis:

    Thumbnail for the embedded element "Variance Analysis Part 1 of 3"

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    Thumbnail for the embedded element "Variance Analysis - Part 2 of 3"

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    Thumbnail for the embedded element "Variance Analysis - Part 3 of 3"

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    You might want to save these videos to favorites as we will be working with them again in the next few learning outcomes!

    Now back to our old standby. What if Simply Yoga had the following information available to you?

    • 2010: Sales $7000, wages $3500
    • 2011: Sales $7000, wages $3400
    • 2012: Sales $7000, wages $3600
    • 2013: Sales $7000, wages $5000

    What do you notice? Would you consider the wage variances between 2010 and 2012 to be significant? What about 2013? With stable sales, each variance would need to be examined to insure that payroll was prepared correctly, but the variance in 2013 when comparing wages year to year is significant.  This could happen if there was a teacher shortage, and a higher wage was needed to get enough staff. Can you think of any other reasons that a wage difference this significant might happen?

    Let’s look at another example with our old friends at Hupana Running Company:

    Hupana Running Company’s direct labor information is as follows:

    Year Direct Labor Budgeted Direct Labor Actual
    2010 $20,500 $20,400
    2011 $21,000 $21,155
    2012 $22,000 $28,500
    2013 $23,000 $23,900

    Which years would you not worry about from a variance perspective and which would be of concern?

    When we look at various years, we can see that small variances happen. It might relate to unanticipated overtime in the case of small unfavorable variances or a particularly quick worker in the case of small favorable variances. But look at 2012. This is a variance that needs to be investigated. Maybe there was a machine breakdown that left employees standing around for a week, or perhaps high turnover led to a period of time needed to train new employees, thus slowing production.

    What is another answer for the higher labor in 2012? We don’t see a very important number that could help answer this question: sales. What if we had a banner year, and sales were through the roof? Then this variance makes perfect sense.

    Whatever the case, it is important to look at history and determine if a variance is significant or a normal variance.

    CC licensed content, Original
    • Significant Variance. Authored by: Freedom Learning Group. Provided by: Lumen Learning. License: CC BY: Attribution
    All rights reserved content
    • Variance Analysis Part 1 of 3. Authored by: Tony Bell. Located at: https://youtu.be/i2Ho1v0g4h4. License: All Rights Reserved. License Terms: Standard YouTube License
    • Variance Analysis: Part 2 of 3. Authored by: Tony Bell. Located at: https://youtu.be/td2TxqzbthA. License: All Rights Reserved. License Terms: Standard YouTube License
    • Variance Analysis- Part 3 of 3. Authored by: Tony Bell. Located at: https://youtu.be/7UcxWOt4ArM. License: All Rights Reserved. License Terms: Standard YouTube License

    10.16: Significant Variance is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

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