Charles Yip Choy is a director in Aqua Ltd.Company. You are the Management Accou
ID: 2516884 • Letter: C
Question
Charles Yip Choy is a director in Aqua Ltd.Company. You are the Management Accountant.The company produces and sells luxury water beds. The most recent monthly sales results showed a decrease in sales of water beds for the 3rd consecutive month. At the same time production costs have increased in relation to the amount of units sold. You have been championing the cause for the implementation of a full system of Standard costing and Variance analysis. In a recent meeting with Charles you voiced your concern about the recent results and the need for a Standard costing system, as you believe that this would greatly assist in pointing to the cause(s) of the drop in sales units and the cost increases. Charles has some knowledge of such a system but wishes to learn a bit more, especially in relation to the investigation of variances. As Management Accountant, draft a reply to Charles which discusses the various factors to be considered in deciding when a variance should be investigated.
Explanation / Answer
When shall" variances be investigated?
A "Standard" is just the costs that are expected to be incurred in the upcoming period. So, there is a high possibility that the standards may vary from the actual costs. These variances are bound to happen and need not be investigated.
However, sometimes, due to unusual factors, there arises a need to investigate the variances and the reasons for such variances. The following are some of the factors that can be considered to decide whether an investigation of variances shall be done or not:-
1) Size/Amount : Sometimes, businesses may decide to investigate the variances if they exceed a particular amount. For instance, business may decide to investigate all variances exceeding $ 10,000 or variances exceeding 10-15% of the budget/standard .
2) Nature of variance: Variances can be favourable or adverse . Generally, businesses do not investigate if the variances are favourable to them . So, if a variance is adverse, it is more likely to be investigated.
3) Cost benefit analysis : VAriances shall be investigated only if the benefits derived from such investigation is more than the cost of investigation.
4) Trend analysis : Analysis of the variances of the past periods shall be done to know if they follow a particular pattern . They shall be investigated if they deviate from the particular pattern or if there are abnormal/ unsual changes in the pattern.
The above listed were some of the factors that need to be looked into when investigating a variance. However, the list is inclusive and there can be more factors affecting the variances which may differ from business to business.