Question

Consider the way variance analysis is used in sales and marketing, research and development, and administrative functions. Provide examples of how variance analysis is or could be used to inform decisions.

Answer 1

Variance analysis- This is the quantitative investigation of the difference between actual and planned behavior. This analysis is used to maintain control over a business operation.

Application of variance analysis in various field of business-

1.            Sales and marketing- In variance analysis we compare actual cost with predefined slandered cost of such item. Marketing and sales section of an organization decide the cost per unit, total production cost, selling price, and total profitability on the basis of slandered data of variance analysis.

2.            Research and development- when actual performance not as per slandered than organization research and development section investigate to find out reason/causes for these difference and variance. And reports these variance to top management to take necessary action.

3.            Administrative functions- Administrative section of an organization takes reports of variance and their causes. This variance may be favorable or unfavorable. If variances are favorable then this section analysis the causes of variance and revise the slandered cost if require. But variance are unfavorable, than this section takes necessary action to resolved it.

Application of variance analysis in decision making- Top management of an organization takes his entire decision basis on this analysis. It enables the decision maker/ top management to draw various results of each cost component. The major cost component is material, labor, overheads. From these results top management take action to improve efficiency and performance of a business entity. If done effectively, variance analysis leads to attain business objectives and goals in a way as wanted.