Importance of Variance Analysis

Variance analysis is aimed at getting practical pointers to the purposes of off-the -standard performance hence management can improve operations, raise efficiency, utilize resources more effectively and reduce costs. For this to be achieved, the given need to be met as:

1. A simple standard costing system such is easily well understood via everyone in the organization.

2. Fast and timely reporting of variances at the point of incidence as like to attach responsibility for favourable or unfavourable variance.

3. Rapid management action to accurate adverse unfavourable variances and encourage favourable variances.

4. Utmost commitment to the process of setting standards and performance evaluation via all employees and managers.

Conversely, not all variances are identified and acted upon. Only such types of variances, that fulfill the cost control desires of the organization and meet performance evaluation purposes of the entity are calculated, identified and acted upon. Consequently, the only criterion for the calculation of a variance is its usefulness to the organization: if it is not useful for management reasoned, then it must not be calculated.