Page 172 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 8: Management Control through Variance Analysis

4. Determine the specific, separable impact of each casual factor by varying a particular Notes
factor while holding all others constant.
5. Add complexity sequentially, one layer at a time, beginning at a very basic “common
sense” level.
6. Stop the process when the added complexity at a newly created level is not justified by
added useful insights into the casual factors underlying the overall profit variance.
The techniques of variance analysis, as stated, are a mathematical manipulation of two sets of
data to gain some insights into the underlying causes of variation. One amount is treated as the
basic standard or reference point. Variance analysis has wide applications and is frequently
applied in the following situations:

1. Investigation of the variations between actual results of the current period with the actual
results of the prior period, the prior period is considered as the base.
2. Investigation of the variations between actual results and standard costs, the latter is
treated as the base.
3. Investigation of the variations between actual results and budget goals, the latter is treated
as the base.

8.1.1 Approaches

There are numerous ways to investigate variances. To determine the underlying causes, some of
the primary approaches are:
1. Conferences with supervisors, foreman and sometimes other employees in the particular
responsibility centres involves
2. Analysis of the work situations including the flow of work, co-ordination of activities,
effectiveness of the supervision and other prevailing circumstances
3. Direct observation
4. On the spot investigation by line officials
5. Investigation by staff groups (specifically designated as to responsibilities)

6. Audits by internal audit staff
7. Special studies
8. Variance analysis

Self Assessment

Fill in the blanks:
1. A ………….occurs when actual costs differ from standard costs.
2. The techniques of …………….are a mathematical manipulation of two sets of data to gain
some insights into the underlying causes of variation.
8.2 Analysis of Sales Variances

There are two distinct methods of computing and presenting sales variance, (1) Sales value or
Turnover method and (2) Sales margin (Profit) method. The first method shows the effect of
variances in terms of turnover and second shows the effect in terms of profits.

LOVELY PROFESSIONAL UNIVERSITY 167