Introduction
When using variance analysis, actual and standard data are compared. The analysis can be done for a division, department, program, product, region, or other responsibility centers. If there is a deviation in the materials, responsibility should be established and corrected. Insignificant deviations are not considered until they acquire a repetitive nature or do not entail potential complications in work. In general, the rule applies: it is advisable to study possible deviations if this will lead to a reduction in costs due to corrective actions by an amount exceeding the cost of the study itself.
Discussion
Determining the importance of variances is mandatory for costs that correspond to critical activities, such as advertising campaigns and production support. Often the reasons for deviations are outdated standards or incorrect budgeting and not the execution of the work itself. By finding out the reasons for deviations, the manager can make operations more efficient and less costly (Brewer et al., 2021). If deviations are out of control, corrective action becomes impossible. For example, the amount of utility bills is not controlled by the company’s management.
When analyzing variances for all types of production costs: direct material costs, direct labor costs, and overhead costs, it is essential to remember that each type of variance does not exist in isolation and cannot be considered from each other. Each deviation affects the others in one way or another. For example, a favorable variance in the price of labor may be due to the use of cheaper labor and be accompanied by an unfavorable variance in the consumption of materials due to significant losses or an unfavorable variance in labor productivity because it takes a long time to produce an equivalent amount of product.
Conclusion
In conclusion, it may affect business overheads due to the need for more working hours to produce products; or it may be an unfavorable volume variance in overhead costs due to poor operator skills and a high number of equipment failures. The control goal can be formulated as a compromise choice of a combination of deviations with a minimum loss of quality and cost gain.
Reference
Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2021). Introduction to Managerial Accounting. McGraw-Hill Create.