Significance points of variance, Managerial Accounting

Significance points of Variance

The following significant points must be kept in mind:

Controllability:  

Controllability should also influence the decision whether to examine further. When there is a common worldwide price raise in the price of a significant raw material there is nothing that can be done internally to control the consequence of this. When a central decision is made to award all employees a 10% raise in salary, staff costs in a division will rise by this amount and the variance is not controllable by a division’s manager. Uncontrollable variances call for a change in the plan, not an examination into the past.

Variance trend:

When, say, an efficiency variance is Sh.1,000 adverse in month 1, the apparent conclusion is that the procedure is out of control and that corrective action should be taken. This might be correct, though what if the same variance is Sh.1,000 adverse every month? The trend points out that the procedure is in control and the standard has been wrongly set.

Assume, though, that the same variance is constantly Sh.1,000 adverse for each of the first six months of the year though that production has gradually fallen from 100 units in month 1 to 65 units by month six. The variance trend in absolute terms is steady, though associative to the number of units produced, effectiveness has got gradually worse.

Posted Date: 12/8/2012 2:40:40 AM | Location : United States







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