Question

could cost variances be caused by the actions of people other than those who are "typically" responsible for such variances in the organization? What would be some examples?

Answer 1

Variance analysis compares standard to actual performance. It could be done by division, department, program, product, territory, or any other responsibility unit. When more than one department is used in a production process, individual standards should be developed for each department in order to assign accountability to department managers.

Variances may be as detailed as necessary, considering the cost/benefit relationship. Evaluation of variances may be done yearly, quarterly, monthly, daily, or hourly, depending on the importance of identifying a problem quickly. Because actual figures (e.g., hours spent) are not known until the end of the period, variances can be determined only at this time.

When the production cycle is long, variances that are computed at the time of product completion may be too late for prompt corrective action to be taken. In such a case, inspection may be undertaken at key points during the processing stage. This allows for spoilage, labor inefficiency, and other costs associated with problems to be recognized before product completion.

One measure of materiality is to divide the variance by the standard cost. A variance of less than 5 percent may be deemed immaterial. A 10 percent variation may be more acceptable to a company using tight standards compared to a 5 percent variation to a company employing loose standards. In some cases, materiality is looked at in terms of dollar amount or volume level.

--->For example, a company may set a policy looking into any variance that exceeds $10,000 or 20,000 units, whichever is less. Guidelines for materiality also depend on the nature of the particular element as it affects performance and decision-making.

-->For example, where the item is critical to the future functioning of the business (e.g., critical part, promotion, repairs), limits for materiality should be such that reporting is encouraged.

If a variance is out of the manager’s control, follow-up action by the manager is not possible.

---> For example: utility rates are not controllable internally. Standards may change at different operational volume levels. Further, standards should be appraised periodically, and when they no longer realistically reflect conditions, they should be modified. Standards may not be realistic any longer because of internal events, such as product design, or external conditions, such as management and competitive changes. For instance, standards should be revised when prices, material specifications, product designs, labor rates, labor efficiency, and production methods change to such a degree that current standards no longer provide a useful measure of performance. Changes in the methods or channels of distribution, or basic organizational or functional changes, would require changes in selling and administrative activities.

Significant favorable variances should also be investigated and should be taken advantage of further. Those responsible for good performance should be rewarded. Regression analysis may provide reliable association between costs and revenue. Variances are interrelated, and hence the net effect has to be examined. For example, a favorable price variance may arise when lower-quality materials are bought at a cheaper price, but the quantity variance will be unfavorable because of more production time to manufacture the goods due to poor material quality.