VARIANCE ANALYSIS


To investigate or not to investigate before management decides whether to investigate a particular variance, there are a number of factors which should be considered.
o Materiality. population variance calculator in a single time are sure to happen and are unlikely to be significant. Obtaining and’explanation’is likely to be time-consuming and irritating from the manager concerned. The explanation will offer be’chance’that is not, in any case, particularly helpful. For such variations further investigation is not worthwhile.
o Controllable. Controllable should also influence the decision whether to investigate further. When there is general worldwide price increase in the price increase in the price of an important raw material there is nothing that can be done internally to control the impact of this. If a central decision is made to award all examples a 10% increase in salary, staff costs in division A will increase by this amount and variance is not controllable by division A’s manager. Uncontrollable

If, say, an efficiency variance is $ 1,000 adverse per month 1, the obvious conclusion is that the process is out of control and that corrective action must be taken. This may be right but what if the same variance is $1,000 adverse every month? The trend indicates that the process is in control and the standard has been wrongly set. Suppose, however, that the same variance is consistently $1,000 advise for each of the first six months of the year but that manufacturing has steadily fallen kind 100 units in month 1 to 2 65 units by month6.The variance fad in absolute terms is constant, but relative to the number of units generated, efficacy has tot steadily worse.
Management signals from variances fashion information.
Variance analysis is a mend of assessing performance, but it is only a method of signaling to management areas of potential weakness where control action may be necessary. It does not supply a ready-made diagnosis of faults, nor does it supply management with a reedy made indication of what action has to be taken. It merely highlights things for possible investigation.
Individual variances should not be looked at in isolation. As an obvious example, favorable sales price variance is likely to be accompanied by an adverse sales volume variance: the increase in price has caused a fall in demand. We now know in addition that set of variances should be inspected for a variety of successive periods if their full significance is to be appreciated.
Here are a Few of the signals that may be extracted form variance trend information,
O Materials price variances may be favorable for a few months, then shift to adverse variances from the upcoming few months and so on. This may indicate that procedure are seasonal and perhaps stock can be built it up cheap seasons.
O Regular, perhaps fairly slight, increase in adverse rice variances usually indicates the functioning of general inflation. If desirable allowance could be made for general inflation when flexing the funding.
O Rapidly large increases in adverse price variances may indicate a scudded scarcity of a resource.
O Gradually improving labour efficiency variances may signal the existences of a learning curve, or the success of a productivity bonus scheme. In either case opportunities should be sought to encourage the trend.
O Worsening trends in machine running expenses may show up that equipment is deteriorating and will need repair or even replacement.
Interrelationships between variances
Quite possible, individual variances shouldn’t be looked at in isolation. One variance might be inter-related with another, and a lot of it could have happened only because the other, inter-related variance occurred also. When tow varies is interdependent (interrelated) one will usually be adverse and the other one favorable.

O Material price and usage-if cheaper materials are purchased in order to obtain a favorable price variance, materials wastage may be higher and an adverse usage variance may happen. When the cheaper material is more difficult to handle, there might be an adverse labour efficiency variance too. If more expensive material is purchased, however the price variance will be adverse but the usage variance might favorable.