4 Know that there are alternative ways of calculating overhead variance Topic 2

4 know that there are alternative ways of calculating

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4. Know that there are alternative ways of calculating overhead variance. Topic 2: The purpose of variance analysis The only purpose of variance analysis is to provide practical pointers to the causes of off-standard performance so that management can improve operations, increase efficiency, utilise resources more effectively and reduce costs. If follows that overly elaborate variance analysis which is not understood, variances that are not acted upon and variances which are calculated too long after the event do not fulfil the central purpose of standard costing. The types of variances which are identified must be those which fulfil the needs of the organization. The only criterion for the calculation of a variance is its usefulness if it is not useful for management purposes, it should not be produced.
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52 Topic 3 - Responsibility for variances Ideally, variances should be detailed enough so that responsibility can be assigned to a particular individual for a specific variance. Cost control is made much more difficult if responsibility for a variance is spread over several managers. In such circumstances it is all too e asy to ‘pass the buck’. Because of the importance of this principle, standard costing and budgetary control are known in America as responsibility accounting. A simple example of the process of calculating variances in accordance with responsibilities is the subdivision of the direct materials cost variance, that is, the total difference in material costs between actual and standard. This is composed of a usage component, which is usually deemed the responsibility of a foreman, and a price component which is usually deemed the responsibility of the buyer. Accordingly, a usage variance and a price variance need to be calculated to show how much of the total difference is attributed to either person. This example is at the most basic level; frequently more variances are calculated than those given above. Note: The assignment of clear cut responsibilities for variances is an ideal which is difficult to achieve in practice. Interrelationships and interdependencies make the process much more complex than the basic theory. For example, it is conventional to assume that material usage and labour efficiency variances are within the control of the departmental manager concerned. However, where a department receives inputs from another department the receiving department’s operations are greatly influenced by the quality and delivery of its inputs. This is but one example of an interdependency, many others exist in a typical organisation. Topic 4 - The relationship of variances The overall objectives of variance analysis is to subdivide the total difference between budgeted profit and actual profit for the period into the detailed differences ( relating to material, labour, overheads and sales) which go to make up to total difference. The particular variances which are computed in any given organization are those which are relevant to its operations and which will aid control.
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53 Figure 5.1 which shows typical variances which are generally found useful, but
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