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Explain Causes of Variances with the Reconciliation Format

Intermediate Cost Analysis and Management

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Could the Battle of the Bulge Have Been Won if All Battle Maps of Ardennes Forest Looked Like This?

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Terminal Learning Objective

• Task: Explain Causes of Variances with the Reconciliation Format

• Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard: with at least 80% accuracy:• Describe content of effective cost intelligence briefing • Prepare reconciliation for cost intelligence

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3d ACR Feb 7, 2011 Non-deployables Review21 pages

over400

names

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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

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After Action ReconciliationCase A Case B

SpendingWhat was Expected $X $XWhat was Achieved $X - $20 $X+$20Delta $20 ($20)

Reconciliation FormatGood News Story $ $Good News Story $ $Bad News Story ($) ($)Bad News Story ($) ($)Total Explained $20 ($20)

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After Action ReconciliationCase A Case B

SpendingWhat was Expected $X $XWhat was Achieved $X - $20 $X+$20Delta $20 ($20)

Reconciliation FormatGood News Story $ $Good News Story $ $Bad News Story ($) ($)Bad News Story ($) ($)Total Explained $20 ($20)

The coster provides this

part: the credible

intelligence

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After Action ReconciliationCase A Case B

SpendingWhat was Expected $X $XWhat was Achieved $X - $20 $X+$20Delta $20 ($20)

Reconciliation FormatGood News Story $ $Good News Story $ $Bad News Story ($) ($)Bad News Story ($) ($)Total Explained $20 ($20)

The accountable, operational

manager prepares and presents this

part: the story

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After Action ReconciliationCase A Case B

SpendingWhat was Expected $X $XWhat was Achieved $X - $20 $X+$20Delta $20 ($20)

Reconciliation FormatGood News Story $ $Good News Story $ $Bad News Story ($) ($)Bad News Story ($) ($)Total Explained $20 ($20)

or variance

This is a favorable variance since actual cost is lower than expected cost

The technical accounting term for this is a “goodie”

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After Action ReconciliationCase A Case B

SpendingWhat was Expected $X $XWhat was Achieved $X - $20 $X+$20Delta $20 ($20)

Reconciliation FormatGood News Story $ $Good News Story $ $Bad News Story ($) ($)Bad News Story ($) ($)Total Explained $20 ($20)

or variance

This is an unfavorable variance since actual cost exceeds expected cost

The technical accounting term for this is a “baddie”

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After Action ReconciliationCase A Case B

SpendingWhat was Expected $X $XWhat was Achieved $X - $20 $X+$20Delta $20 ($20)

Reconciliation FormatGood News Story $ $Good News Story $ $Bad News Story ($) ($)Bad News Story ($) ($)Total Explained $20 ($20)

“The story” is usually a composite of a number of good news and bad news stories.

Each story has a favorable or unfavorable aspect that should net to the total delta.

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Learning Check

• Who prepares the first part of the After Action Reconciliation report?

• What is the goal of the second part of the report?

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Exercise: Construct the AAR Reconciliation Slide

PLAN number cost per totalcivilian staff 3 10000 30000military 3 12000 36000contract cost 20000trips 5 1500 7500total cost 93500

ACTUAL number cost per totalcivilian staff 2 13000 26000military 3 13000 39000contract cost 25000trips 2 1000 2000total cost 92000

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Exercise: Construct the AAR Reconciliation Slide

PLAN number cost per totalcivilian staff 3 10000 30000military 3 12000 36000contract cost 20000trips 5 1500 7500total cost 93500

ACTUAL number cost per totalcivilian staff 2 13000 26000military 3 13000 39000contract cost 25000trips 2 1000 2000total cost 92000

Is this a “goodie” or a “baddie”?

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After Action ReconciliationSpendingWhat was expectedWhat was achievedDelta

Reconciliation

Total Explained

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

Reconciliation

Total Explained

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

ReconciliationOne less civilian staff but higher rate 4000

Total Explained

This is a “good news” story...sort of

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

ReconciliationOne less civilian staff but higher rate 4000Three fewer, less expensive trips 5500

Total Explained

More good news!

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

ReconciliationOne less civilian staff but higher rate 4000Three fewer, less expensive trips 5500Higher military pay (3000)

Total Explained

This is a “bad news” story

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

ReconciliationOne less civilian staff but higher rate 4000Three fewer, less expensive trips 5500Higher military pay (3000)Higher contract cost (5000)Total Explained More bad news

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

ReconciliationOne less civilian staff but higher rate 4000Three fewer, less expensive trips 5500Higher military pay (3000)Higher contract cost (5000)Total Explained 1500

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Learning Check

• If actual cost is greater than planned cost, how will it be displayed in the After Action Reconciliation?

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Exercise: Redo the Previous AAR by Considering Volume Variance Effects

PLAN number cost per totalcivilian staff 3 10000 30000military 3 12000 36000contract cost 20000trips 5 1500 7500total cost 93500output units 10000

ACTUAL number cost per totalcivilian staff 2 13000 26000military 3 13000 39000contract cost 25000trips 2 1000 2000total cost 92000output units 8000

variable cost

variable cost

fixed cost

variable cost

variable cost

variable cost

fixed cost

variable cost

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Exercise: Redo the Previous AAR by Considering Volume Variance Effects

PLAN number cost per totalcivilian staff 3 10000 30000military 3 12000 36000contract cost 20000trips 5 1500 7500total cost 93500output units 10000

ACTUAL number cost per totalcivilian staff 2 13000 26000military 3 13000 39000contract cost 25000trips 2 1000 2000total cost 92000output units 8000

variable cost

variable cost

fixed cost

variable cost

variable cost

variable cost

fixed cost

variable cost

Planned VC/unit=30000+36000+7500

10000

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Exercise: Redo the Previous AAR by Considering Volume Variance Effects

PLAN number cost per totalcivilian staff 3 10000 30000military 3 12000 36000contract cost 20000trips 5 1500 7500total cost 93500output units 10000

ACTUAL number cost per totalcivilian staff 2 13000 26000military 3 13000 39000contract cost 25000trips 2 1000 2000total cost 92000output units 8000

variable cost

variable cost

fixed cost

variable cost

variable cost

variable cost

fixed cost

variable cost

Actual VC/unit=26000+39000+2000

8000

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Variance TemplatePlan

(100 units)Volume Variance

Flex(80 units)

Perf.Variance

Actual(80 units)

Var. Cost

Fixed Cost

Total Cost

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Variance TemplatePlan

(100 units)Volume Variance

Flex(80 units)

Perf.Variance

Actual(80 units)

Var. Cost 10000*7.3573,500 14,700 8000*7.35

58,800 (8,200) 8000*8.3867,000

Fixed Cost 20,000 -- 20,000 (5,000) 25,000

Total Cost 93,500 14,700 78,800 (13,200) 92,000

1,500Total Cost Variance

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

Reconciliation

Total Explained

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After Action ReconciliationSpendingWhat was expected 93500What was achieved 92000Delta 1500

ReconciliationProduced fewer units 14700Higher variable cost/unit (8200)Higher fixed cost (5000)

Total Explained 1500

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Exercise: Redo the Previous AAR by Considering Volume Variance, Sales, and Profit Effects

PLAN number cost per totalcivilian staff 3 10000 30000military 3 12000 36000contract cost 20000trips 5 1500 7500total cost 93500output units 10000

ACTUAL number cost per totalcivilian staff 2 13000 26000military 3 13000 39000contract cost 25000trips 2 1000 2000total cost 92000output units 8000

variable cost

variable cost

fixed cost

variable cost

variable cost

variable cost

fixed cost

variable cost

planned a $10 per unit price

got a $13 per unit

price©

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Variance TemplatePlan

(100 units)Volume Variance

Flex(80 units)

Perf. Variance

Actual(80 units)

Revenue

Var. Cost

Fixed Cost

Profit

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Variance TemplatePlan

(100 units)Volume Variance

Flex(80 units)

Perf. Variance

Actual(80 units)

Revenue 10000*$10100,000 (20,000) 8000*$10

80,000 24,000 8000*$13104,000

Var. Cost 10000*7.3573,500 14,700 8000*7.35

58,800 (8,200) 8000*8.3867,000

Fixed Cost 20,000 -- 20,000 (5,000) 25,000

Profit 6,500 (5,300) 1,200 10,800 12,000

5,500Total Profit Variance

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After Action ReconciliationRevenue and Cost Plan Actual DeltaRevenueVariable CostFixed CostProfitReconciliation

Total Explained

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After Action ReconciliationRevenue and Cost Plan Actual DeltaRevenue 100000 104000 4000Variable Cost 73500 67000 6500Fixed Cost 20000 25000 (5000)Profit 6500 12000 5500ReconciliationIncrease in selling price 24000Decrease in units (variable cost) 14700Decrease in units (revenue) (20000)Increased fixed cost (5000)Increase in unit variable cost (8200)Total Explained 5500

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Conclusions

• The AAR format is critically important to facilitating command and control

• 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

• Some additional, possible formats and typical explanatory elements follow

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Simple Cost Results and Reconciliation

Output A Plan or Prior Actual DeltaDirect CostIndirect Cost Total Cost X

Reason 1: Change in Number of UnitsReason 2: Change in Direct CostReason 3: Change in Indirect CostTotal Cost Explained X

Reconciliation Explanation for Delta for Output A

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P&L View Results and Reconciliation

Output A Plan or Prior Actual DeltaFee RevenueCost Residual X

Reason 1: Change in RevenueReason 2: Change in Number of UnitsReason 3: Change in CostTotal Explained X

Reconciliation Explanation for Delta for Residual

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Unit Cost Results and Reconciliation

Output A Plan or Prior Actual DeltaUnit Cost A X

Reason 1: Change in Number of UnitsReason 2: Change in Direct CostReason 3: Change in Indirect CostTotal Explained X

Reconciliation Explanation for Unit Cost Delta

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Spreadsheet Exercise

• Redo the previous exercises using the spreadsheet

• Which do you prefer?