Question

How can/should responsibility center managers use accounting information developed from variance anyalysis, standard costs, cost volume profit analysis, and efficiency be utilized to make better decisions.

Answer 1

USES OF VARIANCE ANALYSIS IN MANAGERIAL ACCOUNTING

Variance analysisi refers to the investigation of deviations in the financial performance analysis from the standards that are defined in the organisational budgents

Variance analysis highlights the causes of the variation in income and expenses during a period compared to the budgets that are prepared at the beginning of the year

In order to make variances meaningful, the concept of 'flexed budget' or flexible budget is used when calculating variances. Flexed budget acts as a bridge between the original budget or static budget and the actual results. We can make changes in budget as per variances

Different types of variances are there like material variances, labour variances, overhead variances etc.

Variance analysis facilitates 'management by exception' by highlighting deviations from standards which are affecting the financial performance of an organization. If variance analysis is not performed on a regular basis, such exceptions may 'slip through' causing a delay in management action necessary in the situation and profits will be severely deviated from the actuals and budgets. For this, Variance analysis is very important

Variance analysis lets us to measure the performance and control at the level of responsibility centres

STANDARD COSTING

It will have the benefits like improved cost control, useful information for decision making and managerial planning , reasonable and easier inventory measurement , cost savings in record keeping, production costs can be reduced in the possible areas. Information from this type costing is used for this purposes

Cost-volume-profit analysis, or Shortly called as CVP Analysis, is a method that companies use to find out how changes in costs and volume affect their operating expenses and net income.

Many companies and accounting professionals use cost-volume-profit analysis because it has lot of advantages and it is used

To make informed decisions about the products or services they sell. For this, CVP analysis plays a larger role in managerial accounting than in financing accounting. Managerial accounting focuses on helping managers or those tasked with running businesses like make smart, cost-effective moves. Financial accounting, by contrast, focuses on economic picture of a company so that outside parties, such as banks or investors, can determine how financially healthy it is. In order to get funds from them.

Efficiency represents or signifies a level of performance where highest amount of output is achieved with least amount of inputs.

It tells us whether all inputs used properly and in a most efficient way in order to generate maximum output. Input output ration tells us about the efficiency levels

Managers can make decisions about level of input and level of output in a production