Chapter 20 Production Cost Variance Analyses
Chapter
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Production Cost
Variance Analyses
The preceding three chapters focused on the nature, collection, and measurement of management accounting information. This is the first of five chapters that deal with the use of that information by management in controlling the organization. This chapter and Chapter 2l describe the calculation and use ofvariances. Chapters 22 to 25 deal with the use of responsibility accounting information in the management control process. Variances
A variance is the difference between two numbers. Typically, one number represents what actually happened, that is, measured performance. The other number is a performance standard, such as a standard cost, a budget, or historical performance (what happened in the past, such as last month or last year).
A variance analysis involves the decomposition of the variance into the individual factors that caused the variance. There is no one way to do variance analyses; many types of variance analyses can be appropriate in certain situations. Some involve comparisons of actual and expected results for individual line items in the accounting records. For example, managers might be interested to know that actual expenses were greater than budgeted expenses because tral'el expenses were higher than expected, or that sales were lower than expected because one large customer did not order its normal quantity of goods. Other variance analyses involve the simultaneous investigation of the effects of prices, volumes, production or sales mixes, and exchange rates. Managers perform these variance analyses because they provide important insights about problems (or opportunities) that might exist.
This chapter describes techniques for analyzing production cost variances in a way that provides managers with useful insights in controlling the various organuational elements that affect the performance of the production function. Most manufacturing companies use the standard sets of production
'^
l.:
v
-
Production Cost
Variance Analyses
The preceding three chapters focused on the nature, collection, and measurement of management accounting information. This is the first of five chapters that deal with the use of that information by management in controlling the organization. This chapter and Chapter 2l describe the calculation and use ofvariances. Chapters 22 to 25 deal with the use of responsibility accounting information in the management control process. Variances
A variance is the difference between two numbers. Typically, one number represents what actually happened, that is, measured performance. The other number is a performance standard, such as a standard cost, a budget, or historical performance (what happened in the past, such as last month or last year).
A variance analysis involves the decomposition of the variance into the individual factors that caused the variance. There is no one way to do variance analyses; many types of variance analyses can be appropriate in certain situations. Some involve comparisons of actual and expected results for individual line items in the accounting records. For example, managers might be interested to know that actual expenses were greater than budgeted expenses because tral'el expenses were higher than expected, or that sales were lower than expected because one large customer did not order its normal quantity of goods. Other variance analyses involve the simultaneous investigation of the effects of prices, volumes, production or sales mixes, and exchange rates. Managers perform these variance analyses because they provide important insights about problems (or opportunities) that might exist.
This chapter describes techniques for analyzing production cost variances in a way that provides managers with useful insights in controlling the various organuational elements that affect the performance of the production function. Most manufacturing companies use the standard sets of production