Managerial Usefulness/Importance of Variance Analysis

Managerial Usefulness/Importance of Variance Analysis:

Learning Objectives:

  1. Explain the importance of variance analysis for management in decision making process.

Costs of production are effected by internal factors over which management has a large degree of control. An important job of executive management is to help the members of various management levels understand that all of them are part of the management team. Standard costs and their variances are an aid to keeping management informed of the effectiveness of production effort as well as that of the supervisory personnel. supervisors who often handle two thirds of three fourth of the dollar cost of the product are made directly responsible for the variance which, show up as materials variances (price, quantity, mix, and yield) or as direct labor variances (rate and efficiency). Materials and labor variances can be computed for each materials item, for each labor operation, and for each worker. Factory overhead variances (spending, controllable, idle capacity, volume, and efficiency) indicate the failure or success of the control of variable and fixed overhead expenses in each department.

Variances are not ends in themselves but springboards for further analysis, investigation, and action. Variances also permit the supervisory personnel to defend themselves and their employees against failures that were not their fault. A variance provides the yardstick to measure the fairness of the standard, allowing management to redirect its effort and to make reasonable adjustments. Action to eliminate the causes of undesirable variances and to encourage and reward desired performance lies in the field of management, but supervisory and operating personnel rely on the accounting information system for facts which facilitate intelligent action toward the control of costs.

You may also be interested in other articles from “standard costing and variance analysis” chapter

  1. Standard Costs and Management By Exception
  2. Setting Standard Costs – Ideal Versus Practical Standards
  3. Direct Materials Price and Quantity Standards
  4. Direct Materials Price Variance
  5. Direct Materials Quantity Variance
  6. Direct Labor Rate and Efficiency Standards
  7. Direct Labor Rate/Price Variance
  8. Direct Labor Efficiency | Usage | Quantity Variance
  9. Manufacturing Overhead Standards
  10. Overall or net factory overhead variance.
  11. Controllable variance
  12. Volume variance
  13. Spending variance
  14. Idle capacity variance
  15. Efficiency variance
  16. Spending variance
  17. Variable efficiency variance
  18. Fixed efficiency variance
  19. Idle capacity variance
  20. Mix and Yield Variance – Definition and Explanation
  21. Materials Mix and Yield Variance
  22. Labor Yield Variance
  23. Factory Overhead Yield variance
  24. Variance Analysis and Management By Exception
  25. Managerial importance and usefulness of variance analysis
  26. Advantages and Disadvantages of Standard Costing System
  27. Standard Costing Discussion Questions and Answers
  28. Standard Costing and Variance Analysis Formulas
  29. Standard Costing and Variance Analysis Problems and Solution
  30. Standard Costing and Variance Analysis Case Stu

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