Variance Investigation Workflows

A flagged ratio is the start of an investigation, not a conclusion. Operating margin dropped 400 basis points year-over-year. Why? The variance investigation workflow traces the ratio back to its component line items, identifies which line items drove the change, and then examines the narrative disclosures for the explanation.

The investigation prompt: "Operating margin decreased from 22% to 18% year-over-year. Decompose this variance: which line items on the income statement drove the margin compression? For each contributing line item, quantify its impact in basis points and identify the management explanation from the MD&A or earnings call transcript." This produces a variance bridge — a step-by-step decomposition that shows exactly how the margin moved from 22% to 18% and why.

1. 1. Identify the Variance Start with the flagged ratio. Define the variance precisely: "Operating margin declined 400bps from 22.0% to 18.0% between FY2024 and FY2025."
2. 2. Decompose into Components Break the ratio into its component line items. For operating margin: revenue change, COGS change, SG&A change, R&D change. Quantify each component's contribution to the total variance in basis points.
3. 3. Source the Explanation For each material component, find the management explanation in the MD&A section, earnings call, or footnotes. If there is no explanation for a material variance, flag that omission — it may warrant a question to investor relations.