Variance analysis in management Accounting

Variance analysis in management Accounting

Description/Paper Instructions

Variance analysis

Variance analysis is a management accounting technique that compares actual results to budgeted or planned results in order to identify and understand the reasons for the differences. This information can then be used to improve future performance.

Variance analysis can be performed for a variety of items, including costs, revenues, and profits. The specific variances that are analyzed will depend on the specific goals of the analysis. For example, a company may be interested in analyzing variances in order to:

Identify areas where costs are too high

Determine whether revenues are meeting expectations

Understand the impact of changes in the market on profitability

There are two main types of variance analysis: static and flexible. Static variance analysis compares actual results to a static budget, which is a budget that is not adjusted for changes in activity levels. Flexible variance analysis compares actual results to a flexible budget, which is a budget that is adjusted for changes in activity levels.

The following are some of the most common variances that are analyzed in variance analysis:

Cost variances: These variances measure the difference between actual costs and budgeted costs. Cost variances can be further broken down into price variances and quantity variances. Price variances measure the difference between actual prices and budgeted prices. Quantity variances measure the difference between actual quantities and budgeted quantities.

Revenue variances: These variances measure the difference between actual revenues and budgeted revenues. Revenue variances can be further broken down into price variances and volume variances. Price variances measure the difference between actual prices and budgeted prices. Volume variances measure the difference between actual quantities and budgeted quantities.

Profit variances: These variances measure the difference between actual profits and budgeted profits. Profit variances are calculated by combining cost variances and revenue variances.

Variance analysis can be a valuable tool for managers to improve the performance of their organizations. By identifying and understanding the reasons for variances, managers can take steps to correct problems and improve future performance.

Here are the steps involved in variance analysis:

Set the budget. The first step in variance analysis is to set the budget. The budget should be realistic and achievable, and it should be based on sound planning assumptions.

Collect actual data. The next step is to collect actual data for the period under review. This data should include information on costs, revenues, and profits.

Calculate the variances. Once the actual data has been collected, the variances can be calculated. The variances are calculated by comparing the actual data to the budget.

Analyze the variances. The next step is to analyze the variances. This involves identifying the reasons for the variances and determining whether they are favorable or unfavorable.

Take corrective action. Once the reasons for the variances have been identified, corrective action can be taken. This may involve changing the budget, improving efficiency, or taking other steps to improve performance.

Variance analysis is a valuable tool for managers to improve the performance of their organizations. By following the steps outlined above, managers can identify and understand the reasons for variances, take corrective action, and improve future performance.

Here are some of the benefits of variance analysis:

It can help managers to identify areas where costs are too high or revenues are too low.

It can help managers to understand the impact of changes in the market on profitability.

It can help managers to improve efficiency and productivity.

It can help managers to set realistic and achievable budgets.

Variance analysis is a powerful tool that can help managers to improve the performance of their organizations. By following the steps outlined above, managers can use variance analysis to identify and understand the reasons for variances, take corrective action, and improve future performance.

Variance analysis in management Accounting

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