We use a health care application to illustrate how variance analysis can be used to benchmark costs across similar service delivery sites. Variances for personnel costs, typically the largest cost component in service organizations, are calculated for price, quantity, and skill mix components. Skill mix is important since employees with different compensation often work together to produce service outputs. We find that the joint variance, which arises when both prices and quantities differ, has more managerial implications when assigned to the quantity variance, rather than its traditional allocation to the price variance. Using time-driven activity-based costing also leads to a new variance that reflects the impact of personnel capacity differences between sites. Finally, we introduce two new visualization tools to display the variances. Educators can teach students how variance analysis reveals opportunities to reduce personnel costs by identifying and transferring best practices across sites.

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