Benefits of the variance analysis/ standard costing

Topics: Economics

There are several benefits of the variance analysis; the variance analysis compares actual costs against budget. If actual performance is better than standard there is said to be a favourable costs variance. E. g. If standard labour cost is 36 but actually works out to be  32 there’s a favourable difference of  4. This means that the costs are lower than expected. However if actual performance is worse than standard this is said to be an adverse or unfavourable variance. Variances are a method of control and can show if the firm is running efficiently.


can also be a motivating factor for the staff as if an adverse exists staff must work hard to change the adverse into a favourable in the future. Variance analysis is also classed as a method of appraisal as staff can easily know if they have done well when the variance is favourable. Staff can monitor their progress and assess how well they are performing. Variance analysis helps and is a tool of, Planning function.

Control function. Motivating function The variance analysis can be used on any expenditure of the business. There are a number of advantages of using this techniques.

By calculating variances a firm such as JCC can identify areas of weakness and inefficient practice. If a variance appears to be too high than it can be investigated using an approach called management by exception. This can allow tolerance in the control system. Some firms only investigate variances if they are more than 5 to 10% different from the standard .

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Disadvantages of the variance analysis/ standard costing It can be difficult sometimes to forecast as obtaining the numbers can be difficulty and costly. Variance analysis can also de motivate staff as it could restrict permanent improvements as

the worker might achieve goal and not do more. Variances could also restrict the idea of continuous improvement as just meeting targets and not doing more could de motivate staff and company performance. In some cases to carry out standard costing it can require a business to gather large amount of information. The process can be time consuming and in some cases expensive. Most firms use standards costing as an ongoing process so the costs are ongoing. There are some unforeseen consequences with standard costing. A member of staff in order to achieve a favourable variance might purchase cheap poorer quality

materials. This would bring the costs down but it could effect sales as product made with poor material. This could damage the reputation of the firm and losses as low sales. The variances have occurred due to many factors such as the decline in sales, material costs, labour costs and even the marketing of the product. The variances have occurred as the market is in decline and the firm is only aiming its product at the older segment and not at the younger age as they are more interested in computer games. The product is not targeted at the new market but only for those in there 40 – 60s.

Another cause that I believe has resulted in the poor variances is the special order being lost probably due to the firm not meeting production deadlines so as a result the variance has occurred. I believe is the main reason why the variances have occurred and this is because of the machinery is said to be old and not reliable and also the variance targets could be set too high or even too low so this must be investigated to a further extent. The material variance resulted in an adverse this is probably due to the price of the material, the price of the materials could have increased so firm should of searched out for a new cheaper supplier.

The budgeted amount was 490 whilst the actual amount was 342 so there was an adverse of 58. More material was used than predicted this I think was probably due to a lot of wastage or even workers making mistakes and wasting materials. Another reason for this variance could be the theft of the material. I think the firm did not take advantage of bulk buying so major discounts were lost and could have resulted in the adverse variance.

The material costs could also have been budgeted too low and the firm did not realise the increase in prices, wastage so this could have also hindered the variance. The labour variance also showed an adverse, as the budgeted was 96 whilst the actual came to 105 meaning an adverse of 9. This is another adverse in the firm’s variance analysis and is caused by the ageing workforce I feel. Most of workers are in their later age and could suffer form illnesses. The main reason I feel the variances have occurred is due to the old machinery the firm owns as it could have broken down and valuable man-hours had been lost whilst the machinery was being fixed.

Labour time management and training could also have occurred the variances as the workers could be poorly trained and could not carry lout the tasks in the required times. The power variance is shown to be a favourable in the analysis as budgeted was 4. 8 and actual was 4 so a favourable of 0. 8. This is a positive variance but it is only achieved as the firm has only produced fewer goods as machinery kept on breaking down. The variance could also have been set too low so even as this is a positive variance it musty still be investigated as why it has occurred as a positive. The fixed production cost variance is a favourable by .

The budgeted amount was 50 whilst the actual came to 48. This has occurred probably due to good management or even a reduction in fixed costs. If a firm keeps its fixed costs too low they might be emitting vital functions of the business that could reduce the firms efficiency and in return could suffer high costs to the business in the loss of productive efficiency and sales by keeping fixed costs deliberately low. On the bases of my variance analysis I will recommend the following suggestions to the firm so the variances could be minimised. In order to minimise the variances the firm must recognise its operations.

The sales variance was relatively high so the firm needs to concentrate and improve the marketing effect. The firms could take such actions as an increase in its advertising campaign, so it is increasing the knowledge of its product. To improve the variance the firm could target a new segment the younger generation with newer model cars and benefits. By effective marketing research and approach the firm should target new customers who would want these benefits. The firm main aim should be effective marketing especially at the newly identified 40 to 60 year olds. Ongoing marketing will increase potential sales thus higher profits can be achieved.

The firm is selling nostalgia so variances could be achieved through effective management and by improving standard costs and the overall efficiency of the business. The firm must ensure that the budget costs are equal to actual costs and this can by done effective market research and planning that will result in a efficient firm. All extensive favourable variances that have occurred I feel must be investigated as they could have been set too low and the firm did not budget effectively.

The firms number one aim should be to enforce accurate budgets and team working, training and also investment into new machinery and the results will show up in profits. Cellular production could also be used to create job deepening and widening as a result the average work day will became more interesting and worker will work more effectively and also less absentees. By training workers and working effectively the firm would benefit from correct budgets and profit. Bulk buying and extensive market research is vital to successful and must be fully met. I will now construct a sales forecast for the next year.

Jan Feb March April May June Low low increase 10000 10000 15000 18000 20000 30000 July Aug September October November Decline high 20000 25000 25000 51000 80000 Dec Total 388800 for year predicted are. High 84800 I came to the above sales forecast conclusions that I have created y referring to the appendix 2 in case study that I had. By using the sales variance I have predicted that that sales will fall. The sales forecast above are my predictions but I have also taken into account the declining market, as children are less interested in toys and more in computer games.

So I have decided to have a 10% decline in the sales predictions. I have taken 10% of the original sales prediction of 432000 from last year. The new total I have come to is 388800. A 10% decline. Later on sales that I have predicted should increase as the firm has identified the new market of 40to 60 years olds who are interested in model cars and also the exporting form Taiwan could help the increase of sales. Ensuring that the above recommendations made by me are taken into account. Of effective marketing and management, the control of budget, thus the sales should increase.

I must reiterate that marketing should be an ongoing process so the consumers can be informed of what is new and available. The highest sales will be made at Christmas due to the festive season. This is the time of the year where JCC needs to get its marketing policy precise as most firms take advantage of the holiday season and launch many products. At the beginning of the year the sales are very low but gradually they will increase this would be due to the firm employing effective marketing and attracting a new segment. Based on the figures presented in appendix 1 I will calculate the monthly profit using marginal costing.

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Benefits of the variance analysis/ standard costing. (2018, Jan 31). Retrieved from

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