ACCA PM Syllabus D. Budgeting And Control - Investigating variances - Notes ^{5 / 5}

When should variances be investigated?

When deciding which variances to investigate, the following factors should be considered:

1. Reliability and accuracy of the figures. 

   Mistakes in calculating budget figures, or in recording actual costs and revenues, could lead to a variance being reported where no problem actually exists (the process is actually ‘in control’).

2. Materiality. 

   The size of the variance may indicate the scale of the problem and the potential benefits arising from its correction.

3. Possible interdependencies of variances. 

   Sometimes a variance in one area is related to a variance in another. 

   For example, a favourable raw material price variance resulting from the purchase of a lower grade of material, may cause an adverse labour efficiency variance because the lower grade material is harder to work with. 

   These two variances would need to be considered jointly before making an investigation decision.

4. The inherent variability of the cost or revenue. Some costs, by nature, are quite volatile (oil prices, for example) and variances would therefore not be surprising. 

   Other costs, such as labour rates, are far more stable and even a small variance may indicate a problem.

5. Costs and benefits of correction. 

   If the cost of correcting the problem is likely to be higher than the benefit, then there is little point in investigating further.

6. Trends in variances. 

   One adverse variance may be caused by a random event. 

   A series of adverse variances usually indicates that a process is out of control.

7. Controllability/probability of correction. 

   If a cost or revenue is outside the manager’s control (such as the world market price of a raw material) then there is little point in investigating its cause.