The Need for Variance Analysis - Term Paper Example

The Need for Variance Analysis The need for variance analysis Introduction Adhering to the budget is imperative in any organizationin order to prevent overspending. In many cases, budget implementers find themselves spending more than the projected amounts in the initial budget. To determine the possible causes of overspending, variance analysis is inevitable (Baker and Baker, 2014). This paper describes the value of variance analysis in decision making and the next steps that i would need to take after variance analysis using a given case study.

Value of variance analysis in decision making Before delineating the value of variance analysis in decision making, it is important to define variation and variance analysis. Baker and Baker (2014) define variance as "The difference between standard and actual prices and quantities" (p. 201), and variance analysis as "Analysis of these differences" (p. 201). Variance analysis underscores or brings attention to deviations from what was initially intended. It is only after deviations have been identified that adequate and effective decisions can be made by the individuals in management positions (Baker and Baker, 2014).

According to Berger (2011), lack of conducting a variance analysis may prompt leaders to overlook areas causing these deviations and hence fail to make relevant decisions. For variance analysis to be performed, a prior formulation of standards ought to be conducted, for instance, budgetary targets (Baker and Baker, 2014). This shows that variance analysis drives managers and other leaders to set targets or standards in advance. Decision making goes hand-in-hand with accountability in that individuals overseeing areas proved by the variance analysis to be causing the variations are answerable.

Therefore, departmental heads are forced to make effective decisions and implement relevant strategies that forces them to operate within the budget (Berger, 2011). Steps that preceding variance analysis In the case study, new procedures for discharging patients have been implemented. A variance analysis conducted after six months showed that costs were running 25 percent higher than was expected. After conducting the variance and proving that there is actually a deviation from the budget by 25 percent, the next step would be to identify the causes of the deviation (Berger, 2011).

There are many areas that may cause the deviation, for instance, extended working hours that increase the cost of labor. After identifying the cause of the deviation, then my next step would be to evaluate action plans under implementation to determine their effectiveness and investigate how they can be improved (Berger, 2011). If the action plans are ineffective altogether, then i would create new strategies to address the problem in a bid to prevent a similar problem from occurring in future.

After implementation of new strategies, the next step i would take as reiterated by Berger (2011) is to monitor the activities or processes involved in discharging the patients and how funds are used in order to identify decrease in total variations. Conclusion In conclusion, variance analysis aids in the identification of areas causing variations, and the causes of variations hence guiding the decision making process. Decisions can only be made after a problem, in this case deviation, has been identified.

The steps that would follow a variance analysis include identification of the cause of variation, evaluation of the action plans under implementation to find out their effectiveness, and then improving on these actions plans or creating new strategies to address the problem. Monitoring must also follow in order to make out whether implemented strategies have actually led to a reduction in total variations. ReferencesBaker, J., & Baker, R. W. (2014). Health care finance: Basic tools for nonfinancial managers (4th ed.). Burlington, MA: Jones and Bartlett Learning.Berger, A. (2011).

Standard Costing, Variance Analysis and Decision-Making. Munich, Germany: GRIN Verlag.