Question

(PLEASE TYPE THE ANSWERS)(ACCOUNTING 640)

Consider variance analysis in a service industry. Is it a good thing to use or a bad thing to use? Why? What good behaviors could it encourage? What bad behaviors might it encourage? Consider a service industry you are familiar with or something like a call center or tax practice

Answer 1

We are familiar with two service industries ie. tax practice and Courier services. The implementation of standard costing and Variance analysis is a difficult task to apply in the service sector, whether it is courier or tax practice services or any other service. This is because the service sector does not involve any major costs like material or labor towards delivering the services to customer. The most of the cost comprises of the overhead expenses and other related costs. The past records show that there is hardly any control information exists in Variance Analysis & Control in controlling of overhead and allied costs. The application of the standard costing in the service sector is not possible as not much costs are involved. The current improved approaches of application of standard costing and applying Variance analysis like Activity Based Costing, is also not possible being lack of cost items.

So, on the advantageous side, there hardly exists any advantage to implement the standard costing and Variance Analysis in the service industry.

The disadvantages of applying Variance Analysis to Service industry are that it is difficult to set standards to costs for Variance analysis. Controlling the overhead and allied costs, which constitutes major portion, is not possible to control as no standards can be set.

=============================