Greenwich Engineering - Problems in Identifying Controllable Variances - Assignment Example

Areas with sizeable variances receive more attention by managers on an ongoing basis than the areas with minimal variances. This involves the identification of variances and also the controllability of those variances which are unfavourable. (Horngren et al, 2002) Identifying controllable variances is a complex process as there will be a multiplicity of factors operating on the variance. Variances often interact with each other making the job of the manager in identifying the controllability difficult.

For instance, a labour efficiency variance may be the result of the problems caused by labour as well as the problems encountered with machinery and pieces of equipment. The poor quality of materials used may also lead to lesser efficiency in the labour. Apart from this in some cases the managers tend to trade off variances, purposely incurring an unfavourable variance that is more than offset by favourable variances. (Accounting) The variances being identified under standard costing are too aggregated and setting standards is often a complex process.

This makes the standards arrive at a very last stage and hence the standards may not actually be used to control the variances in time. The calculation of variances is often attempted as a post-mortem analysis which is really not useful to the management for planning and control purposes. The variance analysis under the standard costing system focuses on less important items to a large extent. For instance, the standard costing attaches too much importance for the labour cost and efficiency variances which have become unimportant in the modern day manufacturing environment, where automation has taken the prominence.