tools-for-enterprise-performance-evaluation

Com 36 variance analysis tools for enterprise

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Unformatted text preview: ks at bookboon.com 36 Variance Analysis Tools for Enterprise Performance Evaluation 4.14 Careful Interpretation of Variable Overhead Variances Material and labor variances are more easily interpreted than variable overhead variances. The variable overhead efficiency variance can be somewhat confusing because it may reflect efficiencies or inefficiencies experienced with the base used to apply overhead, rather than overhead itself. For Blue Rail, remember that the total number of hours was “run up” beyond plan because of inexperienced labor. A good manager will want to keenly evaluate the cause and meaning of variable overhead variances. In fact, the variances are likely only the point of beginning for a proper evaluation. Remember that variable overhead is made up of many components. For Blue Rail, it is conceivable that the inexperienced welders used more welding rods, and the welds were likely sloppier requiring more grinding to smooth out the joints. Further, it is likely that inspectors had to spend more time checking work to make sure that the welds were strong. While the overall variance calculations would provide signals about these issues, a manager would actually need to drill down into each individual cost component (perhaps calculating variances for each budgeted line item rather than just on an overall basis) to truly find areas for business improvement. How important is control of overhead? A study of self-made 50-year old millionaires revealed very little correlation between wealth and income, and a strong correlation between wealth and life-long savings patterns. Although the study is related to individuals, the message rings equally true for business. Careful control of spending is essential to long-term value building. Businesses vary considerably in their attitudes and discipline as it relates to control of overhead. Some businesses are rather cavalier about controlling things like light/electricity usage, control over low cost parts, efficiency in shipping methods, etc. Others are rather fanatical about maintaining absolute and stringent controls. For instance, one controller of a manufacturing plant was frustrated with the number of screws that were dropped and left to be swept away at the end of each business day. These were seemingly insignificant to the employees. In frustration, the controller scattered a box of nickels onto the factory floor -- by the end of the day none remained for the janitorial staff to sweep away. A subsequent memo was issued reminding everyone that screws cost 5¢ each. The rather obvious point was to draw a comparison between the nickels that everyone was eager to recover and the screws for which there was little concern. To build a successful business, a good manager will keep a keen eye on all overhead items, and control them with vigor. The variable overhead variances are macro indicators of success in accomplishing this goal. 4.15 Variances Relating to Fixed Factory Overhead Frequently (but not always), actual fixed factory overhead will show little var...
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