Question

How frequently do you believe that firms should conduct variance analysis and why?​

Answer 1

Corporates perform variance analysis on periodical basis. This period can be monthly, quarterly, semi-annually or annually. It all depends upon the need of businesses and a perfect balance is also maintained so that it is cost effective also because generally organizations view it as wasteful expenditure.

In my opinion, variance analysis should be done on monthly basis because: -

1.       It helps the management accountant to identify the variances quickly and take remedial action to prevent any further leakage of revenue.

2.       Finance Manager can also compare actual monthly balance with budgeted costs and identify the scope of improvement.

3.       Manager try to investigate for logical reasons of unfavourable variances. For example, Labour Rate variance can give an indication of fluctuation in labour rates. If there is no such case of increase in labour rates, then there is a need for investigation to resolve the issue.

4.       Variances are also divided into controllable and uncontrollable and all controllable variance should be tried to make favourable.

5.       Management can also plan to improve the profitability of their business operations by analysing the budgeted data and comparing it with actual data.

6.       Responsibility of each individual departments also gets fixed because analysis is done at individual departments level too.

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