Managerial Usefulness/Importance of Variance Analysis:
Learning Objectives:
- 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.
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