Question

What are variances and why do these occur? What factors would you consider when deciding whether to investigate a variance?

Answer 1

Solution:

Variances are the difference between standard cost and actual cost. These differences arises due to change in rates or change in quantity. Variances occur, because we predict the budgeted cost at the start of period and due to various internal and external factors budgeted cost and actual cost can never be same. Therefore it is very common that variances exist. However impact of various may be lower or higher.

Factors to be considered when deciding wheter to investigate a variance:

1. Variance should be investigated only if benefit of investigation is higher than cost of investigations.

2. You can review variances of past periods, if variances are significant in the current period as compared with past period then variance should be investigated.

3. If budget prepared is based on various assumption that do not exist then we should investigate the variances and update our budget.

4. If figures used to compute variances are not reliable, then we must investigate variances and correct the same.