The below article discusses the Role of Variance Analysis in Businesses Management.
Variance analysis or Analysis of Variance - ANOVA is of great use and importance in business management. It’s a tool applied to budgeting and management accounting process which helps to make comparisons between two or more means. It enables the decision makers to draw various results that in turn lead to improve efficiency and performance of a business entity. If done effectively, variance analysis leads to attain business objectives and goals in a way as wanted.
Being a quantitative investigation of variance between the actual and the planned behavior, ANOVA, analysis of variance is a good means for checking the accuracy, evaluating the performance and implementing remedial actions against the weak areas of a business - as and when needed. Assisting management in identifying the cause of variance itself on the one hand, it leads towards the accomplishment of business objectives and goals on the other. While what is done through variance analysis is just to quantify the difference between two figures - budgeted and actual ones, it aids greatly to control over the expenses by determining the planned versus actual costs and the variances between them that might lead to adjusting business objectives, goals and strategies accordingly.
Having been applied to the operational and the financial data, variance analysis aims at better efficiency and performance by computing variances between actual and targeted levels of performance.
It is through regular variance analysis that the factors preventing the business entity from making its optimal level of performance can be ascertained, whereas the impediments to a successful business can be determined and the corrective measures be taken against them. In a more positive form, Analysis of Variance, ANOVA aids in framing more accurate budgets in future facilitating management to identify trends, problems, opportunities and threats.
Some of the most common variances that are used in variance analysis are: Labor rate variance, Labor efficiency variance, selling price variance, purchase price variance and material yield variance. Concisely, when calculating the variance, if the budget amount is subtracted from the actual amount what indicates is whether it’s positive or negative variance. That is to say, if it’s favorable or unfavorable.
Whatever be the variance, the root cause of positive or negative variances as well as the relationship between the pairs of variables has a lot to do with the process of variance analysis, as it reveals what has caused for deviations and what should be done in the future to overcome the problems. Thus, the process of variance analysis enables to compare different scenarios in order to make better decisions, so that the overall performance and efficiencies may be improved and the desired results of a business entity may be attained in a successful manner.
K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (PhD-Management)
Post Graduate Diploma in Computer Applications and Programming
Level 1 - Leadership and Management ILM – UK
Individual Member of Institute of Management Consultants of India
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