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The crux of standard costing lies in variance analysis. Standard costing is the technique whereby standard costs are predetermined and subsequently compared with the recorded actual costs. It is a technique of cost ascertainment and cost control. It establishes predetermined estimates of the cost of products and services based on management’s standards of efficient operation. It thus lays emphasis on “what the cost should be”.
These should be costs are when compared with the actual costs. The difference between standard cost and actual cost of actual output is defined as the variance. The variance in other words in the difference between the actual performance and the standard performance. The calculations of variances are simple. A variance may be favourable or unfavourable. If the actual cost is less than the standard cost, the variance is favourarable but if the actual cost is more than the standard cost, the variance will be unfavourable. They are easily expressible and do not provide detailed analysis to enable management of exercise control over them. It is not enough to know the figures of these variances from month to month. We infact are required to trace their origin and causes of occurrence for taking necessary remedial steps to reduce / eliminate them.
A detailed probe into the variance particularly the controllable variances helps the management to ascertain:
(i) the amount of variance
(ii) the factors or causes of their occurrence
(iii) the responsibility to be laid on executives and departments and
(iv) corrective actions which should be taken to obviate or reduce the variances.
(i) the amount of variance
(ii) the factors or causes of their occurrence
(iii) the responsibility to be laid on executives and departments and
(iv) corrective actions which should be taken to obviate or reduce the variances.
Mere calculation and analysis of variances is of no use. The success of variance analysis depends upon how quickly and effectively the corrective actions can be taken on the analysed variances. In fact variance gives information. The manager needs to act on the information provided for taking corrective action. Information is the means and action taken on it is the end. In other words, the calculation of variances in standard costing is not an end in itself, but a means to an end.
