Question

How did the managerial accounting process of standard costing and variance analysis improve the analysis of the operations of the firm?

What would be your reaction, as a manager, now that all the “new” information has reached your desk?

Direct Labor Variances

Direct Materials Variance

Overhead Variance

Answer 1

Standard costing and variance analyses shows what are differences between budgeted cost and actual cost.

There may be some unavoidable reasons for the changes in cost which are ignored and taken care of in the next period’s budget such as Increase in sales tax. The other reasons include inefficient employee leading to Labor efficiency variance, lazy work of purchase manager leading to Material Price variance etc.

Variance Analyses help the management to analyze the differences so that necessary actions could be taken in future to avoid the excess expenditure and to award efficient personnel when there is Favorable Variances. The analyses of the variances needs to be done on a frequent basis to get maximum benefits and timely corrections/adjustments.

As a manager if I have reports stating Direct labor Variance, Direct Material Variance and Overhead Variance then I need to scrutinize the reasons for the variances. Genuine reasons will be incorporated in next period budgets as Standards whereas Variances that came out of Inefficiency of Personnel need to be checked so that next periods actual expenses are not more than standard budget.