Question

I NEED 2 PARAGRAPHS RESPOND TO THIS TYPING SO I CAN COPY IT

How does a manager determine which variances to investigate? Give details to support your discussion.

Answer 1

Variance analysis is the best tool in the hands of manager to keep cost of product in line with the budgeted cost. However when there are changes in the budgeted and actual costs, variance arises and manager takes action to control them in a timely manner so that losses can

But question arises that how does manager determine which variance to investigate?

The task of variance analysis is generally assigned to the cost manager of company who is an expert in handling such type of situations.

Let us understand how this works with an illustration.

Suppose the cost manager notices that actual material cost for the current period has surpasses the budgeted material cost of current period.

Now a MATERIAL COST VARIANCE arises in such situation ie BUDGETED COST - ACTUAL COST.

Now material cost variance may occur due to two possiblities. Wether the direct material is been procured from the suppliers at higher rates than anticipated or the direct material is been consumed in production at higher rate than expected. Hence cost manager will now analyse the MATERIAL PRICE VARIANCE = ( BUDGETED RATE - ACTUAL RATE ) * ACTUAL QUANTITY and also MATERIAL QUANTITY VARIANCE = ( BUDGETED QUANTITY - ACTUAL QUANTITY ) * BUDGETED RATE.

In case price variance is adverse, ie material is being purchased at rates higher than anticipated, then purchase manager of the company will be called upon to explain the reason for such act. In case of his fault, Loss arising to the company can also be recovered from him.

It may arise due to his fault or other reasons such as increase in price in market etc.

In case quantity variance is adverse, ie material is being used in production at higher quantity than anticipated, production manager will be called upon tk explain the reason for such act. In case of his fault, Loss arising to the company can also be recovered from him. It may arise due to his fault or other such as decreased effeciency of machinery or lack of proper repairs and maintainence by management.

Hence after analysing reason and causes of variance, he will try to overcome the problems.

Similarly in cases of Labour cost Variance, which may occur due to LABOUR RATE VARIANCE, LABOUR EFFECIENCY VARIANCE or LABOUR IDLE VARIANCE.

Therefore by comparing the budgeted cost with the actual one, he will determine which variances to investigate and then after investigating them, he will solve them.