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Getting a Handle on Cost

By Drive, Inc. on Wednesday 15 December 2010.

The poorest performance measure any manager could be judged by is variance to budget. Here’s why: Budgets are collections of guesses. Some simple statistical analysis shows that a budget isn’t worth the paper it’s written on (as a performance measure, anyway). Let’s be conservative and say that there are 20 separate accounts that you budget. And let’s be optimistic and say that you have 95% confidence that the amount you budgeted in each account is correct. The probability that your budget is correct is 100x (.95)20 = 35.85%. Furthermore, you only have that level of accuracy if your revenue forecast is exactly on the money. What happens if demand for your product increases or decreases?

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