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Variance InvestigationInvestigating variances is a key step in using variance analysis as part of performance management. When should a variance be investigated - factors to considerSizeA standard is an average expected cost and therefore small variations between the actual and the standard are bound to occur. These are uncontrollable variances and should not be investigated. In addition, a business may decide to only investigate variances above a certain amount. The following techniques could be used:
Favourable or adverse Firms often treat adverse variances as more important than favourable and therefore any investigation may concentrate on these adverse variances. CostFor investigation to be worthwhile, the cost of investigation must be less than the benefits of correcting the cause of the variance. Past pattern Variances should be monitored for a number of periods in order to identify any trends in the variances. A firm would focus its investigation on any steadily worsening trends. The budget The budget may be unreliable or unrealistic. Therefore, the variances would be uncontrollable and call for a change in the budget or an improvement in the budgeting process, not an investigation of the variance. Reliability of figures The system for measuring and recording the figures may be unreliable. If this is the case, the variances will be meaningless and should not be investigated. Methods used when investigating variances (adsbygoogle = window.adsbygoogle || []).push({});A process has a standard time of 50 minutes. Control limits may beset as a fixed amount, a fixed percentage or using a statistical model. Assume they are set at a fixed amount 30 and 70 minutes, and actual times recorded as follows: If the actual time taken falls within the bands, the variance is not significant. Control limits should be set so that there is only a small chance of a random fluctuation falling outside them.
What factors would you consider when deciding whether to investigate a variance?When deciding which variances to investigate, the following factors should be considered. Reliability and accuracy of the figures. ... . Materiality. ... . Possible interdependencies of variances. ... . The inherent variability of the cost or revenue. ... . Adverse or favourable? ... . Trends in variances. ... . Controllability/probability of correction.. Why investigate variances?Cost variance investigation is critical to process control. Cost variances provide a report that indicates the deviation between actual costs and standard costs for process systems. Since standard costs are a priori estimates, it is easy to understand that actual and standard costs are not likely to be identical.
Why should Favourable variances be investigated?A favorable variance indicates that a business has either generated more revenue than expected or incurred fewer expenses than expected. For an expense, this is the excess of a standard or budgeted amount over the actual amount incurred.
What is variance analysis quizlet?What is the definition of variance analysis? The evaluation of performance by means of variances, whose timely reporting should maximise the opportunity for managerial action.
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