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Give a brief idea how you make analysis of Variances. Elaborate on the various Causes of...

Give a brief idea how you make analysis of Variances. Elaborate on the various Causes of Variances and justify whether specific variances should or should not be investigated

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Give a brief idea how you make analysis of Variances. Elaborate on the various Causes of Variances and justify whether specific variances should or should not be investigated.

Variance analysis is the process of checking the difference between budgeted revenue/expense and the actual revenue/expense.

We prepare budgeted revenue/expense before the start of period. This indicates the amount to be spent on each unit of production, separately for material, labor and overheads. The budget is prepared for both, the quantity (in lbs/meters/kgs/units) and value (in dollars).

The detailed budget prepared above is then compared with the actual quantity and amount actually incurred on manufacturing on per unit basis. This is arrived by dividing total quantity/amount from number of units manufactured. This comparison is called variance analysis. Variance analysis is carried out for quantity difference and amount(rate) difference both, whether it is favourable or unfavourable. The various causes of such difference may be as given below:

  1. Use of lower quality / cheaper material.
  2. Use of higher quality / costly material
  3. Increase / decrease in price of material
  4. Use of efficient labor with higher labor rates
  5. Use of inefficient labor with lower labor rates
  6. Increase/decrease in labor rates
  7. General increase /decrease in various overhead costs
  8. Increase/decrease in production efficiency of machines

After doing this variance analysis, a list of all variances are prepared. The reasons of such variance are investigated. However, as per the size of the company, management may decide to investigate the variances above a certain limit. This limit is the amount of variance decided by the management as per the size of company. The variance of $10,000 may be a big amount for a small company, but it may be negligible amount for a big company like coke/pepsi. The selection of variance, for detailed analysis, above a certain limit is called Management by Exception.   


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