Question

how can variance analysis be used to analyze and control costs

Answer 1

Variance Analysis deals with an analysis of deviations in the budgeted and actual financial performance of a company. The causes of difference between the actual outcome and the budgeted numbers are analyzed to showcase the areas of improvement for the company. At times, it is also a sign of unrealistic budgets and therefore in such cases budgets can be revised.

Variance analysis aids in analysing and controlling cost as follows:-

• Variance analysis acts as a control mechanism. Analysis of large deviation on key items helps the company in knowing the causes and it helps management look into possible ways of how such deviation can be avoided.

• Variance analysis facilitates assigning responsibility and engages control mechanism on departments where it is required. For example, if labour efficiency variance is seen to be unfavourable or procurement of raw material cost variance is unfavourable, the management can enhance control of these departments to increase efficiency.