Variances Between Expected Value And The Actual Value Essay

Question:

Discusses why it is important to make variance analyses, and how to conduct such analyses in a manufacturing company?

Answer:

A variance is the difference between the expected value and the actual value. Therefore, variance analysis helps in identifying and determining the cause for the gap between the actual value (and the budgeted or planned value. The variance analysis can be applied to the operational and financial figures. On the other hand, Bush (2012) discusses how variance analysis can help in taking control of the rising expenses of the particular projects by tracking the actual costs and planned costs. This type of analysis can assist the company managers in tracking the issues of trends, threats and opportunities relating to either long-term or short-term benefits. Apart from that, variance analysis can be effectively employed in the manufacturing industry. In order to carry variance analysis in context to production costs of the manufacturer, the managers of the company have to take into account the standard costs relating to input that have been arisen from the manufacturing of the actual products, produced by the company (MacFarland, 2012). Further, the actual costs relating to input that have been used for the manufacture of actual products can be evaluated.

For instance, a manufacturing industry manufactures 20000 units of products but the standard of the company indicates that the company should have spent $50000 on materials but the company used about $58000 worth of materials instead. Therefore, the resulting adverse variance has to be assessed by the company. Moreover, the common analysis of variance segregates the $8000 into the variance of quantity and variance of price (Scarborough and Bennett, 2012). Therefore, the quantity variance will help the company to identify the level of input used in the production. On the other hand, price variance can be effective for the company in order to know how much the company has paid for each level of input.

Apart from that, Bush (2012) pointed that cost benefit approach is useful in assessing the costs and benefits that may be related to production. The approach assists in comparing the various costs so that the respective benefits can be generated (Rouwendal, 2012). The approach is quietly related with the variance analysis which helps in analyzing the difference in the costs. Therefore, the company’s staff may need to find out the relevant costs of the product which are associated with it then the monetary value has to be assigned to the costs and to the benefits (Scarborough and Bennett, 2012). The manufacturing company can decide to compare the derived costs and gained benefits from the production. Thus, the cost-benefit approach is as important as understanding the variance analysis.

References

Bush, B. (2012). Variance analysis of wind and natural gas generation under different market structures. Golden, Colo.: National Renewable Energy Laboratory.

MacFarland, T. (2012). Two-way analysis of variance. New York, NY: Springer.

Rouwendal, J. (2012). Indirect Effects in Cost-Benefit Analysis.Journal of Benefit-Cost Analysis, 3(1).

Scarborough, H. and Bennett, J. (2012). Cost-benefit analysis and distributional preferences. Cheltenham: Edward Elgar.

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