What Are The Problems With Variance Analysis?

1.	What Are The Problems With Variance Analysis?
Answer» There are several problems with variance analysis that keep many companies from using it. They are: Time delay: The accounting staff compiles the variances at the end of the month before ISSUING the results to the management team. In a fast-paced ENVIRONMENT, management needs feedback much faster than once a month, and so tends to rely upon other measurements or warning flags that are generated on the SPOT (especially in the production area). Variance source INFORMATION: Many of the reasons for variances are not located in the accounting records, so the accounting staff has to sort through such information as bills of material, labor routings, and overtime records to DETERMINE the causes of problems. The extra work is only cost-effective when management can actively correct problems based on this information. Standard setting: Variance analysis is essentially a comparison of actual results to an arbitrary standard that may have been derived from political bargaining. Consequently, the resulting variance may not yield any useful information. There are several problems with variance analysis that keep many companies from using it. They are:

Answer»

There are several problems with variance analysis that keep many companies from using it. They are:

Time delay: The accounting staff compiles the variances at the end of the month before ISSUING the results to the management team. In a fast-paced ENVIRONMENT, management needs feedback much faster than once a month, and so tends to rely upon other measurements or warning flags that are generated on the SPOT (especially in the production area).
Variance source INFORMATION: Many of the reasons for variances are not located in the accounting records, so the accounting staff has to sort through such information as bills of material, labor routings, and overtime records to DETERMINE the causes of problems. The extra work is only cost-effective when management can actively correct problems based on this information.
Standard setting: Variance analysis is essentially a comparison of actual results to an arbitrary standard that may have been derived from political bargaining. Consequently, the resulting variance may not yield any useful information.

There are several problems with variance analysis that keep many companies from using it. They are:

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