Question

Why does the four-step process of variance analysis enhance a cost center's ability to control costs?

Answer 1

The four steps of variance analysis to help control costs is the best approach that can be adopted by each cost center to ensure that costs are in control. These four steps help management focus on key reason of negative variance and take all the necessary steps to ensure that they are rectified and not repeated unless the variance parameters itself need revision due to change in circumstances. For example- Introduction of labor act by government increasing wages of contract worker.

These four steps are-

1. Calculation of variance- Is the variance significant? if yes then next 3 steps needs to be followed.

2. Analyze variance to identify cause of variance

3. Select performance measures to correct the problem

4. Take corrective action