Question

Prepare a Business Report as if for senior management critically evaluating the purpose of variance analysis and other areas in an organisation where variance analysis would be useful and the practical relevance of detailed overhead variance analysis. Also, find and use at least one other academic reading. Suggested word limit about 500 words

Answer 1

• Variance analysis is essential in helping with budget management via controlling the budgeted v. real expenses. In project management, for instance, financial info is usually examined at main milestones. For example, a month ending report might give quantitative info about expenditures, receipts & left over inventory levels. Variances between the planned & the real expenses might lead to adjustments in business objectives/ strategies .
• Relations between 2 sets of variables might also be identified while doing variance analysis. Negative correlations & positive correlations are essential for business planning. For instance, variance analysis might uncover that when sales for gadget X increase there is a correlated increase in the sales for gadget Y. Enhanced safety characteristics for one item might outcome in sales augmentation. This info might be utilized for transferring this success to some other similar articles.
• One essential kind of prediction is ‘corporate forecasting’. It utilizes patterns of past business info to build a theory pertaining to performance of the forthcoming period. Variance figures are put into context which enables the expert to identify determinants like seasonal changes as the basis of negative variances/ positive variances.

Overhead variance-As most firms utilize perpetual inventory mechanisms, they must update their inventory expenses in actual time. This implies that managers cannot wait till the period ending for adding up all of the overhead expenses incurred & assign them to every job. Instead, the managers must anticipate the forthcoming overhead expenses & assign them across the manufacturing process.

As most anticipations cannot be totally accurate, the real expenses incurred for the time period are only sometimes equivalent to the estimated expenses made across the production process. The discrepancy between these 2 figures is the ‘overhead expenses variance’.

Managers analyse cost variances to ascertain how well the manufacturing process is performing & why the anticipations are different from the real amounts. Managers normally split the cost variances into 3 chief classes :expenditure, efficacy, volume.