Tracking sales, material costs, labor costs, and overhead provides the information that managers need to make intelligent decisions and make their company successful. Some variation in the numbers is normal, and it would not be cost effective to investigate every fluctuation. Factors that managers consider when deciding whether to investigate a variance are size, recurrence, trend, controllability, and whether the change is favorable (Kinney & Raiborn, 2012).First, the size of the variation is an obvious concern. It should fall outside what is considered the normal range, and should also be large enough to make an analysis worth the time and effort. The size of the variation is considered in context, often as a percentage of the standard. Second, the variation should recur, that is, it should not be a one-time event that never happens again, because that would also not be cost effective to investigate. Third, it is important to observe whether the variation is a trend. The appearance of a trend, particularly a negative one, would justify an earlier investigation targeted at preventing the problem from getting worse. Fourth, controllability is essential.
An analysis of variance is a business decision and assumes that the information will be useful and will contribute to the company’s success. If the variation is not under the company’s control, then time spent studying it would be wasted. And fifth, whether the variation is favorable or unfavorable is an important factor in deciding whether to pursue an investigation. Studying favorable variations may yield information on how to improve processes, but unfavorable variations are much more likely to be investigated. Favorable variations may not justify the time and expense. This supports management by exception, which means that managers can quickly spot problems and address them while ignoring everything that is going well. Instead of wading through information on what is going right, they can quickly focus on areas that need attention.
- Kinney, M. R., & Raiborn, C. A. (2012). Cost accounting: Foundations and evolutions. Cengage Learning.