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2PPT.pptxChapter 10- Cost Variance Analysis
Cost Variance Analysis is an accounting control system used to identify, track and control variance in budgets from established levels.
Most budgets do not go as planned- they need periodical supervision and analysis to identify and minimize costs and maximize profits.
Usually performed by financial analysts or managers of the concerned business unit, cost center or task force
It is a useful tool which enables modifications to an otherwise rigid system.
Types of Variance analysis
Price variance- the difference between the actual price of purchase of materials vs the standard price of materials
Quantity variance- the difference between actual quantity of raw materials at standard price vs. the standard quantity of materials at standard price
Labor variance- the difference between actual cost incurred on labor vs the standard cost budgeted for labor
Labor rate variance- the difference between the actual hours worked at the actual rate and the standard hours worked at the standard rate
Labor efficiency variance- the difference between the actual hours worked at the standard rate vs the standard hours worked at the standard rate.
Steps to perform variance analysis to achieve better results
Tabulate the actual costs incurred vs the standard costs based on the type of variance
Identify differences and calculate the total variance
Analyze the results and conduct interviews if needed to identify root cause of variance
Report findings to executives for review and adopt in future budgeting
Numerical example
Consider a shoe manufacturer which sells safety shoes. The following are the sales metrics for the FY 2019:
There is a difference if 10,000 pounds of raw materials for the production of 100,000 pairs of shoes.
Direct materials variance analysis yields a $100,000 favorable result for the organization
| Sales Volume | = | 100,000 | pairs |
| Standard price of raw materials | = | $10 | per pair |
| Quantity of raw materials purchased | = | 100000 | pounds |
| Actual quantity of materials used in production | = | 90000 | pounds |
| Quantity variance | = | (90000 x $10) - (100000 x $10) | |
| = | ($100,000) | favorable |
Chapter 11- Decentralized Organizations
A type of organizational structure where decision-making and authority is delegated to a large number of managers.
It is common in almost all industries and companies after it reached a particular size.
Decentralized Organization Structure
Centralized Structure- Each manager has authority over a wide range of employees
Decentralized Structure- each manager has authority over a smaller number of employees. Managers share similar responsibilities and report in to higher management.
Advantages of decentralization
Greater autonomy for managers and employees- helps build a sense of responsibility and empowers the team
Relieves some duties from upper management- directors and executives can focus on strategy and vision.
Flexibility- decentralization offers the ability to deal with events and emergencies
Ease of expansion- newly built business units and sites can operate independently
Disadvantages of decentralization
Possibility of conflicts- in an effort to out-perform other units, animosity and rivalry may arise between managers
Cost and redundancy- decentralization leads to duplication of efforts- each business unit will have access to common departments which leads to repetition of tasks
Requires trained and capable managers- Decentralization needs managers to perform as independent business owners, with a combination of technical and managerial skills- a combination which is hard to find.
Loss of control- The upper management may lose control over smaller groups and decentralization may lead to creation of silos.
Methods to retain control in a decentralized organization
The fundamental driver to any business is the creation of profits.
Have each business unit/ location report to the same executive who controls investments into each the overall business- This can be the CFO or VP of Finance
Establish cost centers and profit centers which provide executives visibility of each business unit so that they can make executive decisions without formally exercising control over the individual contributors.
References
Managerial Accounting (2012) Saylor Academy. Retrieved from: https://saylordotorg.github.io/text_managerial-accounting/s00- license.html
Managerial Accounting (2012) Saylor Academy. Retrieved from:
https://saylordotorg.github.io/text_managerial-accounting/s15-how-do- managers-evaluate-perfo.html
Production Volume Variance (2019). Retrieved July 2020, from https://www.investopedia.com/terms/p/production-volume-variance.asp
