Question

In calculating budget variances the total variance was broken down into various components, when added up they totaled the total variance. Explain why this is helpful in determing problems and in identifying the corrective action that should be taken to resolve the problems

Answer 1

Explanation

Total Variance of any particular item has many subparts variances.

Variance is basically a comparative analysis of budgeted and Actual cost or sales data.

Example - Material Variance (cost item)

In Material total vost variance - It will show only difference between the budgeted material cost and actual cost. But it wont help management on improvement aspect like improvement in price, quantity consumption, Efficiency etc.

Hence a total cost variance is segregated into various sub parts to better analyse the each and every aspect of that particular variance.

Like in material cost variance - It has two Sub parts viz. Material Price Variance and Material Quantity variance. Price variance helps in analysis of rate at which material purchased against budgeted and Quantity variance helps in analysis of quantity of material consumed for making the final product against budgeted.

Furthe Material quantity variance has two subparts viz. Material Mix Variance and Material Yield Variance.

Material mix variance helps in analysis of component of mixture of material used for final product production against standard which hit the quantity variance and Material yiels variance helps in getting the data relating to actual production against standard production.

Hence different components of variance helps in getting solution for any particular part that item be it price, Usage, Production etc.