Author:AltonShader,JamesBakerVarianceAnalysisMarch19982VarianceAnalysisAgenda•Whatisvarianceanalysis?•Linearvariance–IceCreamCo.•Twocomponentvarianceanalysis–Jesse’sBrewery•Varianceanalysiswithmorethantwocomponents–BostonVideo•Keytakeaways3VarianceAnalysisWhatisVarianceAnalysis?Varianceanalysisisusedtounderstandandassessthedriversofchangeinmeasuredvariables.•Varianceanalysishelpsexplainandunderstandwhatdrivesthedifferencebetweentwomeasuresofthesamevariable(e.g.,1998profitvs.1995profit)•Varianceanalysisexplainsdifferencesbetweenmeasuresbybreakingthosemeasuresintotheirbasecomponents(e.g.,1998revenueand1998OPEXascomponentsof1998profit)andquantifyingtheimpactofeachcomponent•Bainfrequentlyusesvarianceanalysisto–quantifyandidentifytrueprofitdrivers–helpdrivefutureanalysisonthemostleveragedissues4VarianceAnalysisTheValueofVarianceAnalysisWhydoweneedtoperformvarianceanalysis?Givesbusinessinsightastowhatdrivesrevenue/cost/profitLeadsto'actions'Bainusesvarianceanalysistogainbusinessinsightandtoidentifythemosteffectiveandvaluableactionsteps.•Whydoesprofitchange?•Whatdriverhasthemostimpact?•Whatexplainsdifferencesinrelativecostposition?•Usedtodetermineproductlineprofitability•Identifiesareasoffocusforcostreduction•Indicatesimpactofloweringprice•Drivescustomersegmentationstrategies5VarianceAnalysisDefinitionsinVarianceAnalysisMostsituationsfallintooneofthreecategoriesofvarianceanalysis.Description:TwoComponent•UnderstandingindividualimpactoftwovariableonasinglemeasureLinear•SimplecomparisonofonecomponentagainstanotherMorethanTwoComponent•UnderstandingindividualimpactofmorethantwovariablesonasinglemeasureExample:•1998revenueincreasesdrivenby1998priceincreaseandunitsales•1990totalcostperunitversus1995totalcostperunit•Differencesincustomerrevenuedrivenbynumberoftransactions,productmixandotherfees6VarianceAnalysisAgenda•Whatisvarianceanalysis?•Linearvariance–IceCreamCo.•Twocomponentvarianceanalysis–Jesse’sBrewery•Varianceanalysiswithmorethantwocomponents–BostonVideo•Keytakeaways7VarianceAnalysisSituation:•OritandTom’sIceCreamCo.produceicecreamwhichtheysellingallon-sizedcontainersatsupermarketsaroundthecountry•Theyhavetrackedtheircosttoproduceicecreampergallonovertimeandhaveseenitdeclineoverfiveyearsby25%Question:•Whathasdrivencostsdownward?•WhatmightOritandTomfocusontoachievebettercostsavingsgoingintothefuture?LinearVarianceExample(IceCreamCo.)8VarianceAnalysis19951990VarianceProductioncosts:(includessales,labor,admin)$220,500$210,000$10,500Rawmaterialscosts:$63,000$60,000$3,000Advertisingexpenses:$31,500$30,000$1,500Totalgallonssold:70,00050,00020,000LinearVarianceExample9VarianceAnalysisUnitproductioncosts:$3.15$4.20($1.05)Unitrawmaterialscosts:$0.90$1.20($0.30)Unitadvertisingcosts:$0.45$0.60($0.15)Totalperunitcosts:$4.50$6.00($1.50)19951990VarianceLinearVarianceExample(VarianceperGallon)10VarianceAnalysis1990IncreaseinproductionvolumesRawmaterialspurchasingsavingsReducedadvertisingexpense1995$6.00($1.05)($0.30)($0.15)$4.50$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00IceCreamCo.CostperGallonofIceCream(1995ConstantDollars)ThoroughBainanalysisofthedataallocatedthereducedcostsintothreecomponents.LinearVariancesExample(IceCreamCo.)11VarianceAnalysisLinearVariancesExample•ManagementofIceCreamCo.appearstohaveenjoyedincreasingeconomiesofscale,particularly...
