Analyzing Cost Variances

Variance analysis is used as a tool to evaluate performance.

Consider your professional experiences as well as your review of the Required and/or Optional Resources and determine what type of variances might be the most alarming to see.

If cost variance is high, is that an indication of a priority for a firm?

Provide an instance in which favorable variances are just as important to understand as unfavorable variances.

What type of inventory control considerations do you think are occurring with the use of variance analysis?

Variances, high or low can both be a cause of concern for management.

While a lower variance seems more favorable, we must look at why the variance is low. If a lesser quality material was used will those material to hold up for the consumer and will this create a good or bad customer experience, essentially effecting the customer’s feelings toward the product and the company/organization . If this is the reason for the lower variance the company may suffer in the long term. However, if the variance is lower simply because the cost of quality materials were lower in price than anticipated and still give the consumer a great experience and product the lower variance will be favorable.

With high variances management must also be concerned in efforts to cut costs for the project but without sacrificing customer satisfaction and quality materials. High variances are alarming because the company/organization may not be able to raise the funds needed to cover the costs creating a delay or even ending of the project .