Considerations in Variance Investigation

As already notice above, not all variances are investigated; this is only the material and meaningful as for cost control reasons variances that are investigated for further management action. However even as we go into investigating what caused a variance to happen, we need to consider the given factors as:

i. Materiality Management should describe the materiality level that when reached needs to be investigated. Each variance below the materiality level is not investigated.

ii. Sensitivity to Cash Flow: We required considering which variances translate into cash flow implications for example: price variances.  If a variance is extremely highly sensitive to cash flows, then we required to set a low materiality level while if a variance has extremely low sensitivity to cash flow, then we required setting a high materiality level.

iii. Frequency of Occurrence:  A variance that happens consistently or frequently requires to be investigated as early as possible.

iv. Control : we only need to hold managers accountable for the variances that they could control.  Variances caused via factors beyond the manager's control cannot be blamed on the manager, for example: external factors such as the government actions, inflation and unfavourable exchange rates could reasons adverse variances which the managers cannot be held responsible for.

v. Cost-Benefit Analysis:  If the cost of investigating a variance exceeds the benefits of that organization, then there is no requires of investigating the variance like it is a waste of resources. The reverse is correct.

vi. The management Style: In an autocratically managed organization every variances are investigated like actions are not expected to deviate from the stipulated. In a democratically managed organization, merely the material variances would be investigated.

Posted Date: 2/7/2013 7:44:51 AM | Location : United States

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