Slides explain causes of variances

Explain Causes Of Variances With The Reconciliation Format Principles of Cost Analysis and Management © Dale R Geiger 2011 Could the Battle of the Bulge Have Been Won if All Battle Maps of Ardennes Forest Looked Like This? © Dale R Geiger 2011 Terminal Learning Objective • • Task: Explain Causes Of Variances With The Reconciliation Format • Standard: with at least 80% accuracy: Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • • Deliver effective cost intelligence briefing Describe content of effective cost intelligence briefing © Dale R Geiger 2011 3d ACR Feb 7, 2011 Non-deployables Review 21 pages over 400 names © Dale R Geiger 2011 How Can the Cost War Be Won if All Cost Reports Look Like This? • • • • It can’t – Of course, someone needs to know where the trees are, but Effective command and control needs intelligence formatted in more useful ways Formatting cost information for effective command and control is critically important © Dale R Geiger 2011 After Action Reconciliation Case A Case B Spending What was Expected $X What was Achieved Delta $X $X - $20 $X+$20 $20 ($20) Good News Story $ $ Good News Story $ $ Bad News Story ($) ($) Bad News Story ($) ($) Total Explained $20 ($20) Reconciliation Format © Dale R Geiger 2011 After Action Reconciliation Case A Case B The coster provides Spending What was Expected $X What was Achieved Delta this part: the credible $X $X - $20 intelligence $X+$20 $20 ($20) Good News Story $ $ Good News Story $ $ Bad News Story ($) ($) Bad News Story ($) ($) Total Explained $20 ($20) Reconciliation Format © Dale R Geiger 2011 After Action Reconciliation Case A Case B Spending What was Expected $X What was Achieved Delta $X $X - $20 $X+$20 $20 ($20) Good News Story $ $ Good News Story $ $ Bad News Story ($) ($) Bad News Story ($) ($) Total Explained $20 ($20) Reconciliation Format © Dale R Geiger 2011 The accountable, operational manager prepares and presents this part: the story After Action Reconciliation Case A Case B Spending What was Expected $X What was Achieved Delta $X $X - $20 $20 $X+$20 ($20) or variance Reconciliation Format Good News Story $ $ Good News Story $This is a favorable $ variance since actual cost is lower than expected cost Bad News Story ($) Bad News Story ($) Total Explained $20 ($) ($) accounting term for this is a “goodie”  The technical ($20) © Dale R Geiger 2011 After Action Reconciliation Case A Case B Spending What was Expected $X What was Achieved Delta $X $X - $20 $20 $X+$20 ($20) or variance Reconciliation Format Good News Story $ $ Good News Story $ $ This is an unfavorable variance since actual cost exceeds expected Bad News Story ($) ($) cost Bad News Story ($) ($) Total Explained $20 ($20) © Dale R Geiger 2011 The technical accounting term for this is a “baddie”  10 Variance Template Plan Volume Variance (100 units) Flex Perf Actual (80 units) Variance (80 units) Var Cost Fixed Cost Total Cost © Dale R Geiger 2011 26 Variance Template Plan Volume Variance (100 units) Var Cost 10000*7.35 73,500 Fixed Cost Total Cost 14,700 Flex Perf Actual (80 units) Variance (80 units) 8000*7.35 58,800 (8,200) 8000*8.38 67,000 20,000 20,000 (5,000) 25,000 93,500 14,700 78,800 (13,200) 92,000 1,500 Total Cost Variance © Dale R Geiger 2011 27 After Action Reconciliation Spending What was expected 93500 What was achieved 92000 Delta 1500 Reconciliation Total Explained © Dale R Geiger 2011 28 After Action Reconciliation Spending What was expected 93500 What was achieved 92000 Delta 1500 Reconciliation Produced fewer units 14700 Higher variable cost/unit (8200) Higher fixed cost (5000) Total Explained 1500 © Dale R Geiger 2011 29 Exercise: Redo the Previous AAR by Considering Volume Variance, Sales, and Profit Effects PLAN number cost per total civilian staff 10000 30000 variable variable cost cost military 12000 36000 variable variable cost cost contract cost 20000 trips 1500 7500 planned a $10 total cost 93500 per unit price output units 10000 ACTUAL number cost per total variable variable cost cost 13000 26000 military 13000 39000 variable variable cost cost 25000 fixed fixed cost cost 2000 variable variable cost cost trips unit price variable variable cost cost civilian staff contract cost got a $13 per fixed fixed cost cost total cost 1000 92000 output units 8000 30 © Dale R Geiger 2011 Variance Template Plan Volume Variance 10000 units Flex Perf Actual 8000 units Variance 8000 units Revenue Var Cost Fixed Cost Profit © Dale R Geiger 2011 31 Variance Template Plan Volume Variance 10000 units Revenue 10000*$10 100,000 Var Cost 10000*7.35 73,500 Fixed Cost Profit (20,000) 14,700 Flex Perf Actual 8000 units Variance 8000 units 8000*$10 80,000 8000*7.35 58,800 24,000 (8,200) 8000*$13 104,000 8000*8.38 67,000 20,000 20,000 (5,000) 25,000 6,500 (5,300) 1,200 10,800 12,000 5,500 Total Profit Variance © Dale R Geiger 2011 32 After Action Reconciliation Revenue and Cost Plan Actual Revenue Variable Cost Fixed Cost Profit Reconciliation Total Explained © Dale R Geiger 2011 33 Delta After Action Reconciliation Revenue and Cost Plan Revenue Actual Delta 100000 104000 4000 Variable Cost 73500 67000 6500 Fixed Cost 20000 25000 (5000) 6500 12000 5500 Profit Reconciliation Increase in selling price 24000 Decrease in units (variable cost) 14700 Decrease in units (revenue) (20000) Increased fixed cost (5000) Increase in unit variable cost (8200) Total Explained 5500 © Dale R Geiger 2011 34 Conclusions • • • The AAR format is critically important to facilitating command and control • Some additional, possible formats and typical explanatory elements follow It varies to suit the issues at hand and can evolve as the issues change It pinpoints variances to expectation and demands a story from the accountable manager © Dale R Geiger 2011 35 Simple Cost Results and Reconciliation Output A Plan or Prior Actual Delta Direct Cost Indirect Cost Total Cost X Reconciliation Explanation for Delta for Output A Reason 1: Change in Number of Units Reason 2: Change in Direct Cost Reason 3: Change in Indirect Cost Total Cost Explained 36 © Dale R Geiger 2011 X P&L View Results and Reconciliation Output A Plan or Prior Actual Delta Fee Revenue Cost Residual X Reconciliation Explanation for Delta for Residual Reason 1: Change in Revenue Reason 2: Change in Number of Units Reason 3: Change in Cost Total Explained 37 © Dale R Geiger 2011 X Unit Cost Results and Reconciliation Output A Plan or Prior Actual Delta Unit Cost A X Reconciliation Explanation for Unit Cost Delta Reason 1: Change in Number of Units Reason 2: Change in Direct Cost Reason 3: Change in Indirect Cost Total Explained X 38 © Dale R Geiger 2011 Check on Learning • What should we expect to see on any reconciliation? â Dale R Geiger 2011 39 Spreadsheet Exercise Redo the previous exercises using the spreadsheet • Which you prefer? © Dale R Geiger 2011 40 ...Could the Battle of the Bulge Have Been Won if All Battle Maps of Ardennes Forest Looked Like This? © Dale R Geiger 2011 Terminal Learning Objective • • Task: Explain Causes Of Variances With The... Total Explained $20 ($20) © Dale R Geiger 2011 delta 11 Check on Learning • • Who prepares the first part of the After Action Reconciliation report? What is the goal of the second part of the... $X What was Achieved Delta $X $X - $20 $20 $X+$20 ($20) “The story” is usually a composite of a number of good news and bad news stories Reconciliation Format Each story has a favorable or unfavorable