VARIANCE ANALYSIS

Interpretation and interrelationship of variances.


To investigate or not to investigate before management decides whether or not to investigate a particular variance, there are a range of factors which should be considered.
o Materiality. Small variations in a single time are bound to happen and are unlikely to be significant. Obtaining and’explanation’is likely to be time-consuming and irritating from the manager concerned. The explanation will offer be’chance’which is not, in any case, particularly helpful. For these variations further investigation is not rewarding.
o Controllable. If there is general global price increase in the price increase in the price of an important raw material there is not anything that can be done internally to control the impact of this. Uncontrollable

o Variance treads. If, say, an efficiency variance is $ 1,000 adverse per month 1, the obvious conclusion is that the process is out of control and that corrective action has to be taken. This may be correct but what should the same variance is $1,000 adverse every month? The trend indicates that the process is in control and the standard has been erroneously set. Suppose, however, that the same variance is consistently $1,000 advise for each of the first six months of the year but that manufacturing has steadily fallen kind 100 units per month 1 to 2 65 units by month6.The variance fad in absolute terms is constant, but relative to the amount of units produced, efficiency has tot steadily worse.
Management signals from variances fashion information.
Variance analysis is a fix of assessing performance, but it is only a way of signaling to management areas of potential weakness where control action may be necessary. It doesn’t supply a ready-made diagnosis of faults, nor does it supply management with a reedy made indication of what action has to be taken. It only highlights items for potential investigation.
Individual variances should not be looked at in isolation. As an obvious example, favorable sales price variance is likely to be accompanied by an adverse sales volume variance: the increase in price has caused a fall in demand. We know in addition that set of variances must be scrutinized for a number of successive periods if their entire significance is to be appreciated.
Here are some of the signals that may be extracted form variance fashion information,
O Materials price variances may be favorable for a month or two, then shift to adverse variances from the upcoming few months and so forth. This could indicate that process are seasonal and perhaps stock can be built up it cheap seasons.
O Regular, perhaps fairly modest, increase in adverse rice variances usually indicates the functioning of general inflation. If desired allowance could be made for general inflation when flexing the funding.
O Rapidly large increases in adverse price variances may suggest a scudded scarcity of a resource.
O Gradually improving labour efficiency variances may signal the existences of a learning curve, or the achievement of a productivity bonus scheme. In either case chances must be sought to encourage the tendency.
O Worsening trends in machine running expenditures may show that equipment is deteriorating and will need repair or even replacement.
Interrelationships between variances
Quite possible, individual variances should not be looked at in isolation. One variance may be inter-related with another, and a lot of it could have occurred only because the other, inter-related variance occurred too. When population variance calculator varies is interdependent (interrelated) one will usually be adverse and the other one favorable.

Here is an example,


O Material price and usage-if cheaper materials are purchased to be able to obtain a favorable price variance, materials wastage might be higher and an adverse usage variance may happen. If the cheaper material is more challenging to handle, there could be an adverse labour efficiency variance too. If more expensive material is purchased, however the price variance will be adverse however, the usage variance might favorable.