The word “Variance” can have a lot of meanings that are based on certain contexts. In business, Variance Analysis is a common technique that is used by business owners to help avoid overspending and underspending of company assets during production into quantity and price variances.
The latter occurs when the company pays more than they should for the production of goods, such as labor or materials than what is expected.
The former is where the company utilizes more than they should for the input that was expected.
A business owner must understand these terms so that it can help you figure out where you should focus your company’s resources on and address any problems that the business may face at a certain point in time.
If you do not want to go over the hassles of variance analysis and other accounting measures, then you can just get some accounting services in Malaysia to handle all of those for you.
Bookkeeping is definitely one of the most fundamental aspects of a business. Some small business owners would use the variance analysis framework to help them simplify the overall process of bookkeeping.
Companies that follow this model would record transactions using typical cost techniques. The organization’s accountants would track and record the payments to workers, purchases of materials, and other production costs that are typical to the overall costs of the company. This is regardless of what the actual costs are in the end.
Then, the accountants would create separate accounting entries that will tie everything together and they will put the adjusted amounts to their actual dollar value.
What is the purpose of this? Well, this is just to help the initial accounting entries so much easier to do and will allow the company to track any abnormalities in the costs (if there are any).
Variance analysis can also be used to help small business owners determine which of their many departments are responsible for possible cost overruns.
For instance, if the company overspends on certain materials that are used to create basketball hoops, it can be done in two ways. That is either the company overspending on the price of the materials or that they use more materials than they should to produce those basketball hoops.
It is important to note that such activities would mean that there are a number of people and departments that are responsible for this. For example, the purchasing department is often tasked to secure the prices for raw materials.
The issue, then, may come down to the effectiveness of the production workers or the production manager that oversees the operations.
The small business owner would then use variances to help determine who is the main culprit in this situation and to help address the situation of cost overruns. This entire thing is known as responsibility accounting.
It is important to note that although variance analysis may have its uses; it does have its downsides as well. One of the disadvantages of using variance is that it doesn’t take into account the company’s continuous improvement.
Like other accounting principles, variance information can only be used in certain areas and should only be a complementary piece that will work with other accounting tools.