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Variance analysis is aimed at obtaining practical pointers to the causes of off-the –standard performance so that management can improve operations, increase efficiency, utilize resources more effectively and reduce costs. For this to be achieved, the following need to be met:
- A simple standard costing system that is easily well understood by everyone in the organization.
- Fast and timely reporting of variances at the point of incidence so as to attach responsibility for favourable or unfavourable variance.
- Rapid management action to correct adverse (unfavourable) variances and encourage favourable variances.
- Utmost commitment to the process of setting standards and performance evaluation by all managers and employees.
However, not all variances are identified and acted upon. Only those types of variances, which fulfill the cost control needs of the organization and meet performance evaluation purposes of the entity are identified, calculated and acted upon. Thus, the only criterion for the calculation of a variance is its usefulness to the organization: if it is not useful for management purposed, then it should not be calculated.
Wilfykil answered the question on April 17, 2019 at 08:40
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