Question 2.
The variances are obtained from the subtraction of actual production level from budget production level. The negative value is named as unfavorable variance, whereas the positive values is named as favorable variance.
Question 3.
The purpose of variance analysis is that, variance analysis helps managers to plan and control in the operations of the organization. Through variances analysis, the managers are able to make decisions on areas to prioritize on allocation of resources based on the nature of variances. In case of unfavorable variances, the managers should focus on these areas in resource allocation. Variances also influence the direction of decision making. The nature of variance whether favorable or unfavorable will influence the way managers make decisions regarding the operations of the organization. They influence the level of concentration on some activities depending on the nature of variance. They help in improving the overall organizational performance.
It is crucial that all variances be analyzed. This will result to an overall organization performance analysis. The overall variances to be analyzed includes productivity and efficiency variances. This will help in determining the performance level of the organization. The cost variances should also be analyzed to evaluate the efficiency in cost management of the organization. The variation in production units will also assist in determining the changes in production levels. This shows that, it is important to analyze all the variances in an organization. This will assist an organization in achieving its set goals and objectives.
References
Balakrishnan, R., Sivaramakrishnan, ,. K., & Sprinkle, G. (2008). Managerial Accounting (illustrated ed.). New York: John Wiley & Sons.
Reddy, R. (2004). Management Accounting. New Delhi: APH Publishing.
