Q – Please read the discussion below and prepare a Reply to this discussion post with
comments that further and advance the discussion topic.
Please provide the references you used.
Ensure zero plagiarism.
Word limit: 200 words
Discussion
Evaluating Variance from Standard Costs
Evaluating variances from standard costs is a crucial aspect of managerial accounting, as it allows
organizations to monitor and control their operations, make informed decisions, and improve overall
efficiency.
This process involves comparing actual costs and revenues with the predetermined standards, which
are established based on historical data, industry benchmarks, and expected performance.
Kindly find below the importance of evaluating variances, the reasons for variances, and how to
address them.
Importance of Evaluating Variances:
1. Performance Measurement: Variances act as performance indicators, helping managers assess
how well their departments or teams are performing. They provide a basis for evaluating efficiency
and identifying areas that require attention.
2. Cost Control: Variances highlight differences between actual costs and expected costs. By
identifying unfavorable variances (where actual costs exceed standards), organizations can take
corrective actions to control costs and maximize profitability.
3. Decision-Making: Managers rely on variance analysis to make informed decisions. For instance, if a
significant favorable labor cost variance is observed, a manager may consider increasing production
or expanding operations.
4. Budgeting and Forecasting: Variances are essential in the budgeting process. By analyzing past
variances, organizations can create more accurate budgets and forecasts for future periods.
Reasons for Variances:
1. Volume Variances: These variances occur due to changes in production volume. For example, if a
company produces fewer units than planned, it may experience unfavorable volume variances in both
direct labor and materials.
2. Price Variances: Price variances result from fluctuations in the cost of inputs. This can be due to
changes in supplier prices, inflation, or currency exchange rates. For instance, if the price of raw
materials increases unexpectedly, it can lead to unfavorable price variances.
3. Efficiency Variances: Efficiency variances arise from differences in the amount of input required to
produce a unit of output. For example, if workers take longer to complete a task than expected, it can
lead to unfavorable labor efficiency variances.
4. Mix Variances: Mix variances occur when there’s a deviation in the planned mix of products or
services. For instance, if a company produces more high-margin products than anticipated, it can
result in favorable mix variances.
5. Usage Variances: Usage variances relate to the quantity of inputs used. If more materials are
consumed than planned to produce a product, it can result in unfavorable usage variances.
Addressing Variances:
1. Investigate: Begin by identifying the source of the variance. Was it due to external factors like price
changes or internal factors like inefficiencies in the production process?
2. Analyze: Determine the significance of the variance. Not all variances require immediate action.
Focus on those that have a substantial impact on profitability or efficiency.
3. Take Corrective Action: Once the source and significance of the variance are established, develop
and implement corrective actions. For example, renegotiate supplier contracts to address unfavorable
price variances, or provide additional training to improve efficiency.
4. Continuous Improvement: Variances should not be viewed solely as problems but also as
opportunities for improvement. Encourage a culture of continuous improvement where employees are
involved in finding and implementing solutions.
5. Adjust Standards: If variances are consistently favorable or unfavorable due to changes in the
business environment, consider adjusting the standards to reflect the new realities more accurately.
Evaluating variances from standard costs is a fundamental practice in managerial accounting. It
enables organizations to measure performance, control costs, make informed decisions, and refine
their operations. By understanding the reasons for variances and taking appropriate actions,
businesses can strive for efficiency, profitability, and long-term success.
References and resources:
1. “Management and Cost Accounting” by Colin Drury
2. “Managerial Accounting: Tools for Business Decision Making” by Jerry J. Weygandt, Paul D.
Kimmel, and Donald E. Kieso
3. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and
Madhav V. Rajan
4. Academic journals and articles on cost variance analysis in managerial accounting.
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