Factors to Be Considered While Writing a Variance Report

Since the monthly budget results of my variable hospital epartment gave a higher salaries and lower supplies than the initial budget, the following factors will be considered to decide which variances to investigate:

First to consider is the reliability and accuracy of the figures provided. It is strongly believed that errors in accounting for budget records, or in recording actual costs and revenues, could result into variance being reported where no error really exist. Second is the issue of materiality; which has to do with the volume of the variance which shows the degree of the problem and the likely profits coming from its rectification. Furthermore, it is necessary to examine the interdependencies of variances. At times, a variance in one aspect is always linked to a variance in another area. Let’s take for instance; a favorable raw material price variance resulting from the purchase of a lower grade of material may cause an adverse labor efficiency variance because the lower grade material is harder to work with. These two variances would need to be considered jointly before making a survey decision. Moreover, the inbuilt variability of the cost or revenue is also vital. Adverse variance is likely to draw more consideration as they signify problems. However, there is a debate for the analysis of favorable variances so that a business can study from its successes. One unfavorable variance may be caused by a random event. A series of unfavorable variances usually indicates that a procedure is out of control. Another factor is the Controllability/probability of correction. If a cost or revenue is outside the manager’s power (such as the world market price of a raw material) then there is no point in considering its cause. Assuming the cost of correcting the problem is likely to be high than the advantage, then there is little point in doing further investigating. (Neal, 2014)

Relationship between Variances

There could be a relationship among the direct materials variances and the direct labor variances. As a matter of fact, there could be a rapport between many if not all of the variances. Assuming a lower costing material is purchased in order to attain a favorable materials price variance, if the materials have some unhelpful attributes, it is possible that an unfavorable materials usage variance could result. If the materials’ traits cause extra labor hours, then an unfavorable direct labor efficiency variance will result. If the materials required more experienced labor, it is possible that a labor rate variance will also occur. (Turner, 2001)

Interpreting Variances report

Business organizations generally put in order a budget reconciliation report that provides management with a synopsis that bridges actual and expected performance. The report helps identify which areas to scrutinize in order to take apt curative actions and also highlights areas of outstanding performance. It is worthy of note that variances could occur during the usual line of operations, because of a more lasting adjustment in the firm’s operating environment and because budgets or standards are either too rigid or too flexible. (Bolles, 2007)

Actual Result of Performance

Variance investigation is the quantitative examination of the variation between actual and planned behavior. This investigation is useful in maintaining management over a business. Variance analysis is especially efficient when you assess the amount of a variance on a trend line, Hence, sudden changes in the variance level from month to month are more readily apparent. Variance analysis also involves the analysis of these differences, so that the result is a statement of the difference from expectations, and an interpretation of why the variance happened. The control action which may be taken will depend on the motive why the variance occurred. The variance may be a result of a measurement error, e.g. wastage has been unrecorded, scales have been misread or employees may adjust their records to ‘improve’ their performance. Control action is necessary to advance the exactness of the recording system so that measurement inaccuracies do not occur. In periods of high inflation or where operations are subject to technological development, price standards are likely to become outdated. In such cases, there is the need to frequently review and update standards. Spoilage and wastage will both negatively affect the efficiency of operations. It is important to emphasize the cause of the ineptitude that will lead to control action to eliminate the efficiency being repeated. A standard is an average figure, representing the midpoint of different values.

Actual results are likely to deviate from this standard. As long as the variance falls within this range, it will be classified as a random or chance fluctuation and control action will not be necessary. (Iversen, 1987)