January 10th, 2018
Variance Analysis and Its Use
Variance analysis helps management to pay attention to significant differences between the budgeted and actual values. A variance in this case indicates the value of actual performance that is over or under the respective projected values in the budget (Bamber, Braun & Harrison, 2007). Negative variances, usually indicated in brackets portray unfavorable performance while positive integers are an indicator of favorable performance. Wide variances could however indicate poor budgeting skills, adverse economic environment, and/or irresponsible management among other possibilities. Variance analysis thus serves as one tool through which the performance of a cost center, responsibility center or any other organizational division can be evaluated.
Cost accounting processes provide important information to ensure a firm’s success. The first among these are providing detailed information for accuracy of external reports. Further cost accounting provides information for internal reporting purposes that form the basis for sound managerial decisions such as those regarding special orders, target pricing and make or buy options. Further the budgeting procedures provided for by cost accounting provide tools to evaluate management and business performance in addition to providing a guide to control the firm’s expenditure.
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