Question

Explain why variances could be misleading to managers. Differences are not always bad...or are they? What are some measures that you might suggest to control costs?

Answer 1

Variances could be misleading to the managers due to many reasons. The first reason is the inaccurate forecasting of time, cost and other variable that may be different in actual. It brings variances, that is not due to the manager's work, but due to poor forecasting. The second reason can be the inappropriate allocation of resources that can bring variances. When resource allocation is optimized, then variances are eliminated. So, variance should make managers to reevaluate the plan & activities being executed and then take the corrective action.

Differences are not always bad, because, some differences are the reflection of efficient utilization of resources. If actual cost incurred or actual material or labor cost is less than the planned cost, labor or material, then differences are good for the managers.

There are different measures to control costs, that are as follows:

1. Make accurate planning of resource utilization, cost incurred and maintain the adequate inventory to prevent emergency buy.

2. Prepare time based milestones to evaluate the work done. If variances are being created, then review the issue and take correction measures.

3. Apply earned value management techniques to review the project on a regular basis. It will help control the cost as well as time to complete the project.

4. Make plans to prevent delay in the decision making process.

Above measures will help control the cost.