Menu

Managerial Control Techniques and Auditing

0 Comment

Variance is the difference between standard cost and actual cost. Analysis of variance means, carrying out the appropriate investigations to identify the reasons for the variance. It indicates to the management whether the costs are under control or not. Variances can be controllable and uncontrollable. When the variances arise due to inefficiency of a cost center, it is referred to as controllable variance. On the other hand, uncontrollable variances arise due to external causes like an increase in the cost of material, etc. As far as the cost concepts are considered, controllable and uncontrollable costs are very important. In the case of variable factory overhead, the controllable variance is the difference between the actual variable overhead incurred and the budgeted variable overhead. While computing the overhead controllable variance, it is necessary that we stress the overhead incurred, overhead applied and the overhead budgeted for the standard hours also.

Assume if the actual overhead is £46000, overhead applied is £44200, and overhead budgeted for the standard hours allowed is £50800. then the overhead controllable variance is £4800, i.e. the difference of actual overhead and the overhead budgeted for the standard hours. “The controllable overhead variance is expressed as (actual overhead – flexible budget level of overhead) for the actual level of production. It is referred to as controllable because managers are expected to control costs so they are not substantially different from the budget.” (Controllable Overhead Variance). But if the actual overhead is greater than the budgeted overhead, the variance is unfavorable, and if the actual is less than the budgeted, then the variance is favorable. Certain difficulties related to the controllable variance is reduced through effective management control and other budgetary techniques. Overhead variance is the difference between standard overhead cost charged to production and the actual overhead cost incurred. Overheads are controllable and uncontrollable variance. Overhead cost is the sum total of indirect material, indirect labor, and indirect expenses. Overheads are fixed and variable and its cost variance is split in into variable overhead variance and fixed overhead variance.