ANALYSIS OF VARIANCES – AN OVERVIEW:
Management has to perform a number of functions such as planning, organizing, directing, coordinating and controlling. Although all the functions are equally important to ensure the smooth functioning of management but controlling is the last and important among all. Controlling function ensures that the performance of organization must confirm to the objectives or plans.
Analysis of variances is an important technique that helps in controlling the performance and achieving the overall objectives of the business. The term variance means difference. Standard costing will find its importance only if analysis of variance is done.
So, once the standard costing for all the elements of business is set the next step will be to ascertain the actual figures and compare the actual figures with the standard figures. The difference between the actual and standard performance is termed as variance. Therefore, variance analysis means to compute the deviations between the actual and the standard figures.
FAVOURABLE OR UNFAVOURABLE VARIANCES:
When the actual cost is less than the standard cost or the actual profit are better than the standard profits, the variance is said to be favourable and is a sign of efficiency in organization.
On the other hand when the actual cost is more than the standard cost and profits are less compared to standard sets, the variances is said to be unfavourable and indicates inefficiency in the organization.
CONTROLLABLE OR UNCONTROLLABLE VARIANCES:
If the variance can be corrected by taking suitable action and happens mainly due to inefficiency of cost centres termed as controllable variance.
While the uncontrollable variance arises due to external reasons and no person can be held responsible for it.
CLASSIFICATION OF VARIANCES:
Analysis of variances is done in respect of each and every element of cost as well as sale such as:
Direct Material Variance:
When it comes to material, the division and sub division of variances can be as follows:
- Material cost variance
- Material price variance
- Material usage variance
- Material mix variance
- Material yield variance
Direct Labour Variance:
Direct labour variances arise when actual labour costs are different from standard labour costs. Labour variances can be studied under the following sub heads:
- Labour cost variance
- Labour Rate (of pay) variance
- Total labour efficiency variance
- Labour efficiency variance
- Labour idle time variance
- Labour mix variance
- Labour yield variance
- Substitution variance
The overhead cost of variance is basically defined as under or over absorption of overheads and can be classifies as follows:
Overhead cost variance
- Variable overhead variance
- Variable overhead expenditure variance
- Variable overhead effeciency variance
- Fixed overhead variance
- Budget/ expenditure variance
- Volume variance
- Capacity variance
- Calendar variance
- Efficiency variance
It is important to analyse sales variance to get a complete analysis of profit analysis. It can be computed in two ways. Firstly to show its effect on profit value known as profit method of calculating sales variance and secondly to show its effect on the sales value known as value method of calculating profit analysis.
Profit method of calculating variances:
- Total sales margin variance
- Sales margin variance due to selling price
- Sales margin variance due to volume
Value method of calculating variances:
- Sales value variance
- Sales price variance
- Sales mix variance