Management Accounting

Management Accounting Assignment 2009

Q.1. A.

b

Variances are obtained by comparing standard costs with actual results. A large number of variances can be produced with a standard costing system and it can be difficult and very costly to investigate all of these variances. Management must therefore decide which of these variances should be investigated and which can be ignored, the following factors should be considered:

• Are the figures accurate

• Scale – How big is the variance?

• Interdependence – Is one variance affecting or affected by another?

• Trends – Is the variance a recurring one?

• Adverse or favourable – If significant both adverse and favourable variances should be looked into, however, adverse variances are more likely to be investigated

• Controllability – Is the cost outside the control of the manager?

• Cost of correction – If the cost of fixing the problem outweighs the benefit then there isn’t much point in investigating the variance

It must be noted, however, that it is difficult to know in advance if the benefit will outweigh the cost.

The following examples are some of the methods that can be used when investigating variances:

Expected Value Approach

This approach compares the difference between the cost of investigating and not investigating. It looks at the following four components:

1. The cost of investigating the variance

2. The cost of correcting the variance

3. The cost of ignoring the variance

4. The probability that the current state is out of control

This approach is not one that would usually be used as it is very difficult to accurately calculate the probabilities, costs and time without first investigating.

Managerial Judgement Approach

The experience of a manager can often be the reason behind the decision to investigate as variance. Managers will consider factors, such as:

• Past Trends

• Past Experience

• Operating Conditions

• Amount...