Making Variance Analysis More Meaningful
To compose variance analysis as useful aid to management is the main objective of variance calculations. However this can only be done whether we investigate the variances and the data utilized to calculate them. Typical questions that could be asked involve:
i. Is there any relationship between the vacancies as example: did we report an unfavourable material usage variance since we reported a favourable material price variance like a result of purchasing low quality materials?
ii. Can further information than merely the variance be provided through the management as to what could have resulted in the variance? As an example: did the budget employ an unrealistic overhead absorption rate leading to capacity and efficiency variances?
iii. Is the variance important and worth reporting? Materiality. This is no point concentrating on extremely small variances. Usually the management sets a significance level of variances as an example: variances are only investigated only whether they beyond 20 percent of the expected value. Hence a variance of between 1 percent and 19 percent would not be investigated.
iv. Are the variances being reported quickly sufficient, to the right people, in enough or too much detail, along with explanatory notes and is follow-up done to ensure about correction of the situations leading to variances happening?