Why Identifying Variances is Important

Why Identifying Variances is Important

Identifying favorable and unfavorable variances is vital to an organization because each of the two bears significant impacts on the company’s performance. Analyzing the variances offers the organization an insight into various features of performance. For instance, the variances assist in identifying trends that lead to better company performance (Othman & Zambi, 2021). Generally, a favorable variance is encouraged, while an unfavorable variance is not desirable. Identifying the two helps an organization to identify areas where improvements may be required to attain more productivity. Identification can help managers control costs in various ways. First, the identification of unfavorable variances points to areas that are not performing well within the organization, and costs directed toward these channels are reduced. Second, the identification of favorable variances assists managers in pointing out channels where costs incurred generate a return on investment for the company (Hiromoto, 2019). As a result, the managers channel more funds to the items and generate more income for the organization.

After watching the video in the week’s resources, I learned that variances should not be simply accepted because they are favorable. Notably, this is so because there is a need to understand what drives the business to attain favorable variances and maintain them (Garrison et al., 2021). On the contrary, various causes of unfavorable variances, such as cost changes, employee fraud, budgeting errors, and market changes, are worth identifying. The causes should be identified because they can determine the business’s long-term survival. An example relates to personal budgeting, whereby I always spend more than I plan for. I never understood it as having unfavorable variances in my spending. Thus, the concepts will prove relevant and help me deal with the phenomenon.

References

Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2021). Managerial accounting. McGraw-Hill.

Hiromoto, T. (2019). Restoring the relevance of management accounting. In Management Control Theory (pp. 273-288). Routledge.

Othman, R., & Zambi, N. M. (2021). Social media as a learning tool in cost and management accounting. ANP Journal of Social Science and Humanities, 2(2), 39-46.

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Unit 6 DiscussionUnit 6 Discussion
Why is the identification of favorable and unfavorable variances so important to a company? How can the identification of the variances help management control costs? Please explain.
As you are considering the flexible budgeting topic of the week, it is important for you to look at this analysis as a significant contribution to the management of the company. Knowing what the bottom line profit or loss is important. But what is more important is to understand how your actual results varied in terms of units sold versus how the actual cost of each unit differed from the budget.

Why Identifying Variances is Important

Please do watch the video available in this week’s resources – you can turn the sound off and read the script on the right side if you need to. The lecturer has an excellent example that will help you.
Do you have an example that you can share? Sometimes, that’s the best way to answer the question.