All 38 Variance Analysis questions
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Budgeting & Forecasting › Variance Analysis

How do you decide the significance of a variance statistically?

Intermediate

Answer

Set control limits (e.g., based on the standard deviation of past variances or a percentage of budget); variances beyond the limit are deemed significant and investigated, while those within are treated as random noise. This statistical management-by-exception focuses attention on genuinely abnormal results.
Real-world example Only variances beyond two standard deviations from the norm trigger investigation.

Common follow-ups: What are control limits? | How does this focus attention?

The Budgeting Process Variance Analysis Variance Analysis
All 38 Variance Analysis questions