Assignment- 2

Assignment no. 2

Accounting for Management

Group name- Sovereigns

Topic- Variance Analysis

INTRODUCTION

A variance is the difference between an actual result and an expected result. The process by which the total difference between standard and actual results is analysed is known as variance analysis. When actual results are better than the expected results, we have a favorable variance (F). If, on the other hand, actual results are worse than expected results, we have an adverse (A).

Variance analysis is the difference between actual and planned behavior. For example, if you budget for sales to be $10,000 and actual sales are $8,000, variance analysis yields a difference of $2,000.

Variance analysis also involves the investigation of these differences, so that the outcome is a statement of the difference from expectations, and an interpretation of why the variance occurred. To continue with the example, a complete analysis of the sales variance would be:

"Sales during the month were $2,000 lower than the budget of $10,000. This variance was primarily caused by the loss of ABC customer at the end of the preceding month, which usually buys $1,800 per month from the company. We lost ABC customer because we had several instances of late deliveries to it over the past few months."

This level of detailed variance analysis allows management to understand why fluctuations occur in its business, and what it can do to change the situation.

DISSCUSSION

Here are the most commonly-derived variances used in variance analysis (they are linked to more complete descriptions, as well as examples):

Purchase price variance: The actual price paid for materials used in the production process, minus the standard cost, multiplied by the number of units used.

Labor rate variance: The actual price paid for the direct labor used in the production process, minus its standard cost, multiplied by the number of units used.

Variable overhead spending variance: Subtract the standard variable overhead cost per unit from the actual cost incurred and multiply the remainder by the total unit quantity of output.

Fixed overhead spending variance: The total amount by which fixed overhead costs exceed their total standard cost for the reporting period.

Selling price variance: The actual selling price, minus the standard selling price, multiplied by the number of units sold.

Material yield variance: Subtract the total standard quantity of materials that are supposed to be used from the actual level of use and multiply the remainder by the standard price per unit.

Labor efficiency variance: Subtract the standard quantity of labor consumed from the actual amount and multiply the remainder by the standard labor rate per hour.

Variable overhead efficiency variance: Subtract the budgeted units of activity on which the variable overhead is charged from the actual units of activity, multiplied by the standard variable overhead cost per unit.

There are several problems with variance analysis that keep many companies from using it. They are:

Time delay: The accounting staff compiles the variances at the end of the month before issuing the results to the management team. In a fast-paced environment, management needs the information much faster than once a month.

Variance source information: Many of the reasons for variances are not located in the accounting records, so the accounting staff has to sort through such information as bills of material, labor routing, and overtime records to determine the causes of problems.

Standard setting: Variance analysis is essentially a comparison of actual results to an arbitrary standard that may have been derived from political bargaining.

CONCLUSION

Variance analysis is an important central point in system of standard costing. In fact it is variance analysis which completes the process of standard costing and helps in achieving the objective of standard costing i.e., cost control and profit planning. In order to maintain proper control on costs, analysis of variance is an important managerial tool. Variance analysis helps management to understand the present costs and then to control future costs.

RERENCES

http://www.accountingtools.com/questions-and-answers/what-is-variance-analysis.html

http://blog.accountingcoach.com/variance-analysis-standard-cost/

SUBMITTED TO:

Gurdeepak Sir

SUBMITTED BY:

17 Charu Makkar (A),

79 Mohit Bansal (B),

144 Navdeep Singh (C)