INTERPRATATION OF VARIANCE
Controllability, Materiality and Trend are the interpretation of variance. The point of comparing flexed budget and real figures is to see what corrective action, if any, is required to make sure that the plan will be effectively completed. Therefore every variance requires to be considered to see whether it must prompt control action.
Three significant points must be kept in mind:
Materiality:
Small variations in a single period are bound to take place occasionally and are unlikely to be important. Acquiring an elucidation is likely to be time consuming and frustrating for the manager anxious. The elucidation will frequently be ‘chance’, that is not helpful in any situation. For such variations further investigation is not valuable;
Trend:
Though, small variations which occur consistently may require more attention. Variance trend is more significant than a single set of variances for one accounting period. Trend analysis gives information which gives a sign as to whether a variance is fluctuating in acceptable control limits or is moving into an out of control situation’.