Variance Analysis

To investigate or not to investigate before management determines whether to investigate a particular variance, there are a number of factors which should be considered.

o Materiality. Small variations in a single period are bound 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'which is not, in any case, particularly helpful. For such variations further investigation is not worthwhile.

o Controllable. Controllable must also influence the decision whether to investigate further. When there is general global 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 effect of this. In case 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 apparent conclusion is that the procedure is out of control and that corrective action has to be taken. This may be right but what if the same variance is $1,000 adverse each month? The trend indicates that the process is in control and the standard has been erroneously 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 65 units by month6.The variance fad in absolute terms is constant, but relative to the amount of units generated, efficiency 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 possible weakness where control action may be necessary. It doesn't provide a ready-made diagnosis of faults, nor does it provide management with a reedy made indication of what action needs to be taken. It only highlights things for potential investigation.

Individual variances shouldn't 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 pair of variances must be scrutinized for a variety of successive periods if their full significance is to be appreciated.

Here are some of the signals that may be extracted form variance fashion information,

O Materials price variances may be favorable for a month or two, then shift to adverse variances in the next few months and so on. This could indicate that process are seasonal and perhaps stock could be built up it 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 to general inflation when flexing the funding.

O Rapidly large increases in adverse price variances may suggest a scudded scarcity of a source.

O Gradually improving labour efficiency variances may signal the existences of a learning curve, or the achievement of a productivity incentive scheme. In either case opportunities should be sought to encourage the trend.

O Worsening trends in machine running expenses may show that equipment is deteriorating and will need repair or even replacement.

Variance calculator between variances

Quite possible, individual variances should not be looked at in isolation. One variance might be inter-related together with another, and a lot of it might have happened only because the other, inter-related variance occurred too. 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 will 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 however, the usage variance may favorable.