Variance Analysis Cost Management, Control – Application In Service Industries

Variance Analysis Cost Management, Control – Application In Service Industries

Variance Analysis Cost Management, Control – Application In Service Industries

An important feature of meaning of an organization is controlling costs.

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Controlling cost involves producing express or clear cut information on what cost should be which is the variance or deviation between what was and what should have why and what remedial actions should be taken to ensure that actual occurrences agree with the planned.The difference between standard or expected performance and actual performance or result is called a variance. The above goals are what standard costing is all about. The ability to create meaningful variance by comparing actual results with a measure of what should happen is what makes the standard cost (costing) system a patent management tool.

Management function centers on planning and control. In fact planning and control are inseparable. Organization and people takes much time to plan. They put in huge resources creating vision; budgets strategic objectives, mission statements, rolling plans etc and yet controlling become a problem. This means that at the end of the day, many of standard results are recorded.

However, many do not care to go back and review there past activity of which they could have recorded some positive and negative differences between them i.e. what they have and what they plan to have. Thus arousing in them the need to keep standards or reviewing the standard.

Standard is easily described as an accepted example of some thing against which others are compared and judgment passed either as to quality of degree of conformity. Here, Muonwuba (1998: 137) defined standard costing as “predetermined unit cost for the production of units of products under specific working condition”. The standard costing is used as a measuring rule, a yardstick for measuring actual product unit cost when ascertained. Both actual and standard cost is compared and the different is termed variance.

The variance analysis sets out to compare the predetermined standards for an acuity that takes place i.e. what should happen compared with what did happen. He goes on to say that it is important that the standard calculated for comparison is relative t6o the actual achievement e.g. if the loud get activity was 100,000 units or 100000 hours then the standard to be compared with the actual must be the standard for 80,000 units of actual work.

Variances are of great important to cost and management accounts rely in the popular management by exception principle (MBE). It could be favourable (for commendable results) or adverse for poor performance). In treating the variance, Ekwue and Ezeagba (1996: 336) has suggested either:

(i)                 Writing it off to profit and loss account.

(ii)                Writing it off to the cost of sales

(iii)              Writing it forward indefinitely until they wipe back other cost over the years.

Whichever policy any company takes to treat their variance is a matter of choice. However the bone of the matter lies in the question: is there any effort to correct the adverse trend that led to adverse variance and sustain the favourable trend that produces favourable variances.

1.2 BACKGROUND OF THE STUDY

There is a growing emphasis on organizations to imbibe the standard costing system for their financial, cost and managerial controls. Several names have been given to calculate variances all in attempt to analyse them. The question now is whether it is serving the purpose? Is all the sum of the variance relevant or should the specific firm go for specialized variances, which will be more relevant?

It is on the above premise and observation that the researchers intend to explore the answers to the following questions.

v How are the principles behind variance analysis understood by responsible personnel of the organization?

v How realistic and reliable is the standard setting process?

v How quickly are the variances measured and reported to the individual that will take action?

v How dedicated is the effort to investigate why the variance resulted?

v Are their any chain relationship between one variance resulted?

v How best could the variance be disposed? Does it form part of the double entry system?

v Has the problem of variance been planning variances of the operational variance?

This background forms base of research study. They are the main constituents of the ache of the research.

1.3 STATEMENT OF THE PROBLEM

Some school of thoughts will hold that the end justifies the means while another will hold that the means justifies the end. Be that as it may, in standard costing and in any efficient cost control system, the planning, the implementation and the final output are all important. Yet some group will disagree.

Before this time, some hold the believe that things will be what they will be. These groups are described as the liaise faire liaise passes and indifference. This situation has led the researcher to investigate into how far setting standards and analyzing variances arising can help to control cost and what workable system of variance analysis can be developed for specific industries.

Many obstacles will serve as impediment to this:

v Dealt of cost and management accountants:

Most company has not known the important and need to employ the services of cost and management accountants. As a result, they carry on most activities as little as they can on their own.

v Variance reporting and investigation:

This is the issue of relevance, accuracy and timeliness of variance reporting and most importantly interpretation and investigation for the standard costing system to work, all must watch the findings and recommendations made in this study for its full application.

v Inexperienced and Unqualified Accountants:

Suffice it to say that there is a great inflow of people into accounting and the accountancy profession. The unserious and unqualified ones will only produce irrelevant figures, which cannot meet any information requirements.

1.4 OBJECTIVES

The main purpose of this research work is to look into the application of variance analysis and how it can be used to control cost under standard cost system. When cost is controlled automatically, productivity and profitability is greatly enhanced.

It is equally designed to evaluate successfully the significance and benefit of standard costing, which include full participation and involvement of all employees in the organization. It evaluates whether the process of setting, revising and monitoring activities leads to cost reductions and stimulation of cost consciousness. Also whether carefully planned standard could be useful aid to management in determining prices and formulation of policies.

1.5 SIGNIFICANCE

The application of standard costing techniques and managing cost by studying and analyzing variance cuts across all businesses. This study will help to ascertain the applicability of standard costing techniques in service industries.

This study will help trough its findings expose managers to the need to employ cost management accounting to guide their operations. It will also expose them to the benefits of standard costing which includes establishment of the most efficient method of producing the unit which in itself may lead to economic, production efficiency, cost consciousness, abetting internal and external influence, definitions and responsibilities, allowing principles of ‘MBE’ to be operated and providing a valuable aid to management in determining price and formulating policies.

It will equally enable accountants to realize the need to follow up calculated variance, the need to investigate other causes, the implication of not doing so and the opportunity cost lying between the two choices.

1.6 RESEARCH QUESTIONS

It is in the interest of this study to answer the following questions:

v Do managers understand the principle underlying variance analysis?

v How soon or quickly are variance measured and reported?

v Are the reasons for the variance/differences established by management performance?

v Are there relationships between variances?

v Does variance form the part of the double entry system bookkeeping?

v Can further information other than the variance be provided for management?

v How to evaluate the cost of investigating variance so that it does not increase overhead cost of the organization?

v Do companies employ standard costing?

1.7 FORMULATION OF THE HYPOTHESIS

In the course of this study, the following hypothesis will be tested so as to evaluate the use of the variance analysis as an aid to control cost.

Hypothesis one

H0 Efficient and tactful application of standard costing and variance techniques does not significantly help to enhance the cost saving scheme of the organization.

H1 Efficient and tactful application of standard costing and variance techniques significantly help to enhance the cost saving scheme of the organization.

Hypothesis two

H0 Investigation of variance will not stimulate the deduction of areas of loopholes in the procurement, production and selling operations of an organization.

H1 Investigation of variance will stimulate the deduction of areas of loopholes in the procurement, production and selling operations of an organization.

Hypothesis three

H0 Management has not engaged on effective variance analysis as a means of cost control.

H1 Management has engaged on effective variance analysis as a means of cost control.

1.8 RESEARCH METHOD

The method adopted was designed in such manner as to collect data that provide an in-depth knowledge of using the techniques of variance analysis to control cost, which is the major feature of the standard costing system. The method aimed at collecting necessary information from all categories of person in the organization directly or indirectly concerned. This made the data to be free from bias.

1.9 LIMITATIONS AND DELIMITATION

The study will cover the areas of standard costing and control by variance analysis. It will not only show how to operate a standard costing system but also why it is important from the company and employee point of view. It will religiously follow the principles of findings as many ways as possible to force standard costing down inappropriate and unwilling throats.

However, due to time constraint and limited financial resources, only two (2) companies were selected in Anambra state for the study. The interest areas will be how much the system has help the organisation enhance their operation or the reason behind it not being put in place and what system is derived in replacement.

1.10 DEFINITION OF TERMS

v A budget: This is a target or objective to be aimed for. It is a quantitative operation of plan of action established in advance of an activity to which it relates.

v Budgeting: This is a process that involves making estimates or plan for the future of business activities.

v Standard: This is a normal model or desired level used as yardstick for comparison when finally the activity takes place and the actual level is known. It is what is expected to or that should happen under normal circumstances.

v Standard cost: A predetermined cost which management endeavors to achieve with a view of attaining maximum efficiency in the production process under specified working conditions.

v Standard costing: A method of ascertaining the cost whereby static prepared to show:

(i)                 The standard cost

(ii)                The actual cost

(iii)              The difference between these costs which termed the variance. It is a cost control technique based on planning of unit costs, a comparison of actual planned cost and isolation of variance for further analysis and remedial action.

v Variance: This is signpost which alerts management to the need of inquiry into causes of off standard results. A cost variance is the difference between the standard costs for a particular period.

v Variance analysis: Analysis of variance set out to compare the predetermined standard for an activity takes place i.e. what should happen compared with what did happen. It could be favourable (when it is a loss to them either increased expenditure or reduced income)

v Management control by exception: This is so adopted into cost accounting to mean control system where ‘small’ variance may be accepted and only ‘major’ variances are investigated. The smallness refers to the degree of materially and any fundamental effect it can have to decision-making.

1.11 OVERVIEW OF THE COMPANIES

1.11.1 African Feb. publishers limited

The company was originally incorporated as Mc-craw Hill for eastern publishers limited on 2nd of January 1973. This was not changed to African Feb. publishing ltd on 9th of November 1982 with RC Number RC10995.

The head office of the company is at No. 1 African Feb driving Awka road, P.M.B. 1639 Onitsha Anambra State. The directors and managers include Mr. Patrick Omaba, Mrs. R.I. Ekpeh, Mr. J.C. Odike, Mr. Wong Sek Onn and Mr. Lin Tian Swee.

Nature of business: Publishing.

1.11.2 Lancaster Okoro and company

The company was incorporated as Lancaster Okoro Nwamgoro Okoro in i972 under the company’s decree of 1968. It was later changed to Lancaster Okoro and company (charactered Accountants). The company is limited with RC Number A29902. The head office address was 1 Kenyalta Street Uwani, Enugu 042-256775. Principal person’s office is at 49 St. Michael roads Aba 082-2222350. Branch Office includes Onitsha, Owerri, Umuahia, Port Harcourt, and Jos.

Nature of business: Accounting and Auditing services, Tax and taxation advisory, consultancy services, accounting system installation, staff recruitment and Training services.

2.1 REVIEW OF RELATED LITERATURE

The concept of variance analysis forms the bulk of activities under a standard costing system. There are various approaches being adopted in setting standards. On the other hand activities can be measured both in quality and quantity. The problem lies therefore in matching the two (i.e. the standard with one output recorded the control of cost, improved efficiency in productivity and profitability of operations). It will also contribute towards the minimization of normal and abnormal loss being recorded.

This chapter will focus on the natures of a standard costing system, the different view about how standard should be set in organisation, problems with ideal standards, and then, standard costing system as being applied to service industries. It will further show the workability of standard costing and control stimulation of cost consciousness. The main thrust will be as it relates to control of cost.

2.2 OVERVIEW OF STANDARD COSTING

Decoster and Schauger in their book management Accounting (1979: 203) wrote that one of the weakness of historical costing is its failure to provide celeriac for judging the result of day-to-day activities, operations and decisions. A mere comparison of the current period cost with those of the past period will not assure management of proper control over operations. The current period activities could be just as in efficient as those of the previous period. Thus, management of proper control over needs criteria for judging the result or operating decision. Standard costing are one ways to control the cost of any repetitive task such as product, slipping or clerical activities. Standard costing is a costing system that relies on a precise measure of what is obtained if any performance is carried out most efficiently. It ensures that foremost estimates are set for the most efficient situation and used as a measure with which the actual cost ascertained may be compared. Standard cost are predetermination of what cost should be if production is efficient they are current and participated condition but sometimes are cost under normal and ideal condition of efficiency based upon assumed given output and having regards to current condition –Owler and Brown (1984:529). Standard cost system should serve management in its planning and control of cost. There are the need budget from volume when assessing variable cost and he need to reconcile all variance to the difference between planned and actual profit. May benefits are associated with standard costing. Thus, firstly a standard cost system once installed can be cheaper to maintain than historical cost system because it eliminate some bookkeeping and paper work. Secondly, the time and energy expended on developing standard may highlight possible production inefficiencies before actual production begins. The potential benefits of these efforts are cost saving as a result of higher profit. Thirdly, standard costing assists management informally constructing its plans and budgets. Fourthly, standard cost allows management to maintain operation control. Standard costing serve as the focal point of the management information system. The chief advantages secured by this system may be summarized as follows:

v   The setting of standard involves the establishment of the most efficient method of production. This is held to lead to economics. The prices of setting, revising and monitoring standards encourage reappraisal of method, materials and techniques leading to cost reduction.

v   Actual performance ascertained is readily comparable with the performance standard, thereby revealing separately favourable or adverse variance.

v   These variance can be analysed in detail investigation into the causes of each can be carried out by management and consciousness is stimulated at the organization with chose steps that ensures action, direction and control.

v   It provides a valuable aid to management on price determination and policy formulation.

v   Under standard costing system, the effects or cost of variation or the labour wages, the volume of production and alterations in expenses are demonstrated at short interval ad enough. Standard costing is an example of management by exception. A system of standard costing is one of the control techniques that allows the principles of “management by Exception” to be applied. This means that by studying the variances, management do not expend mush time and efforts searching through unnecessary information, but can concentrate their attention only on important matters that is such events that are of material and fundamental nature.

2.2.1 HINDRANCES

As could be rightly expected, no singular system can match all organization. Even some sophisticated holding groups do not use standard cost. The management of these organisations has not realized the relevance or has failed to see its merits. Obviously they have adjudged to be appropriately understood expensive and time consuming to install and to keep up to date a standard quickly because out of date a standard quickly became out of date.

According to Alan Warne report on standard problem, organizations seems to have the simple characteristics required to adopt the system-standard unit of measurement, reasonable small range of products and a product capable of being specified in precise terms. Also, even if the characteristics are there, there is doubt about its usefulness and objectives. He recall his experience in a factory manufacturing exercise books in the north of England where the full treatment was being given-standard cost overhead rates, under and over absorptions, fixed and variable overhead variances all those wonderful calculations but the figure came off the production manager’s desk who does nothing with them nor does the management Accountants, commercial manger or the chief executive

2.2.2 MANAGEMENT ACCOUNTING GUIDELINES No. 5

The number 5 of management accounting guidelines issued by the institute of chartered management accountants (ICMA) was dedicated to the principle of findings as many ways as possible to force standard costing down inappropriate and usually throats. The guideline is intended to be a guide to the implementation of standard costing in organization which does not use it at present. This certainly implies that there must be a use for the technique in every organization without reference to it relevance and cost effectiveness. Parkinson’s Law as quoted by Warner (1984) states that organization must have a standard cost application some where they look for it.

The guideline also mention standard cost application in particular industries-agriculture and extraction. Paragraphs 20 suggest that capital-intensive industries may not need standard costing for labour but will need it for materials. This simply suggest that for such fixed cost of capital-intensive industries, information on volume value than cost is a moiré critical to management next, it suggest that Labour-intensive service organization rely heavily on clerical work measurable, which can be linked to a standard cost approach.

There is also a section of the guideline devoted to the application of standard costing in service industries. However, it has been held that it is easy to talk about applying concepts to service industries but much more difficult to achieve it. Each has a different character and there is a little in common between hotel and catering institute, audit and Accountancy firm and hospital.

Thus, paragraph 42 of the guideline realistically recognize that standard costing has very limited use” in service organization.

However it draws the conclusion that this is indicative of it potentials rather than its lack of relevance. There is also an attempt to suggest how standard costing might be applied in jobbing industries. In the long- term business tends to develop information system, which suits the needs of their manager. Therefore, the current role standard costing and variance Analysis should be a philosophy and concept to be slavishly served.

To conclude, the standard cost information enable the management to see whether processes are being worked economically, and are producing a satisfactory output. It further serves as a guide as to whether prices can be adjusted to meet competition in periods of depression, the records shows at what price, work may be undertaken to secure trade sufficient to overhead accounting for standard costing systems. Lucey (1983:415) did an extensive work in establishing this. Standard costing and the resulting variance form part of the double entry accounting system. Whether the accounting system is an integrated one or separated financial and cost records are kept, there are common features in the way standard costing is normally dealt with accounts.

v Variance is isolated as early as possible i.e. as near as possible to the time of occurrence or when relevant cost is charged to the production.

v Variance accounts are maintained for such type of variance. Each period the accounts are closed down and the balances transferred to the costing profit and loss account.

v Transfer between the work in progress, finished goods and cost of sales accounts are at standard.

v Stock of WIP, finished goods and raw materials are the balances on the respective accounts and are automatically valued at standard.

v Other variance which is specialized for operation of a particular organization will find itself fitted into any relationship in a typical entry.

2.4 THE SETTING OF STANDARD

The determination of standard is a long difficult task and consequently, it is not usual to vary the standards unduly” (Owler and Brown, (1984).

In these early years of standard costing the setting of standard was often a hit. The rule of thumb was often applied, leading to variance which could duly be explained by admitting that the standard must be wrong.

Today, the situations have changed with the advent of modern scientific management accounting institutes. The modern approach to setting of standard uses knowledge, experience and common sense in achieving very reasonable standards, given that standard setting is in blunt terms, guess work etc. Additionally, some percentage of probability of failure is included as normal loss or gain in any circumstances. The procedure takes accounts of the following:

v    Knowledge: Historical information from past records will be used to indicate what was been done, the time, standard hours of work, rates of pay etc and this will serve as base information.

v    Experience: Past and present experience were indicate when remedial action is needed to charge methods, material, machinery or operation, to achieve greater efficiency. Work study techniques are valuable in this area. Managers who have served the organization for long will come out with better standards based on experience.

v    Common sense: This is when you apply sense and set standard while anticipating factors such as change of material prices, rates of pay, inflation, market trends customer performances. If things are carefully taken into consideration there will be little or no variance but if not, they will create variance which can lead to failure.

v    Probability of failure: The concept of standard believes that every thing is perfect and will work according to plan but experience has proved that it is not so, some percentage of Normal Loss will be allowed. It can be seen that a methodical approach as outlined will be achieved with reasonable standard setting but standard can never be so good that no variance occurs. This therefore relates standard costing as a cost control technique.

PROBLEMS ASSOCIATED WITH SETTING OF STANDARD COST

Apart from forecasting errors, the chief problem in setting standard includes the following:

v Quality: Deciding on the quality of the material to be used as a standard is also a peculiar problem. In Nigeria for example, we have 1st grade, 2nd grade, Tokumbo qualities etc. A better quality material will cost more but perhaps may reduce material wastage.

v Inflation: Deciding how to incorporate inflation into the planned unit cost is a problem particularly in Nigeria.

v Quantity or Component mix: The decision on the appropriate mix of component materials to use where some change in the mix is possible and it is a tasking one.

v Pricing: Estimating material prices where seasonal variance or bulk purchase discounts may be significant possesses a problem to setting cost.

v Agreeing the standard: After standard are set, the problem of communicating the standard and ensuring it acceptances usually arises. Any standard which is not agreed (especially labour efficiency standard in not useful).

Thus, Owler and Brown (1984) suggest that when setting standard cost, it is obviously necessary to determine at which level of attainment the firm should aim. In summary setting standard is a detailed lengthy process usually based on engineering and technical studies of times, material and methods. Standard are set for each of the elements which makes up the standard cost, labour, material and overhead.

2.3.1 LEVELS OF ATTAINMENT

There are 3 levels which the past performance is above to attain

v   The level which would necessitate working maximum possible efficiency.

v   The level which is possible by efficient working management. Based on the level of attainment choice, the following standard types are created.

v   Basic standard: Lucey (1993: 265) gives a formal definition of this as a standard established for used over a long period of which a current standard can be developed. It is the standard which is established for use, unaltered for an indefinite period. They are more or less long term standards which only show trend one time such item as material price, labour rate efficiency and the effect of changing methods. They are useless for highlighting current efficiency or inefficiency except if continuously being revised.

v   Ideal standard:  It is a standard which can be attained under the most favourable breakdown. Ideal standard are based on best possible operating conditions, a situation of perfect efficiency. This makes it highly unattainable in practice for normal day to day control activities, it hinges on the level is rather unrealistic and will often yield adverse variance due to the high standard demanded. The committing result is that while management is stimulated to greater effort the employers are discourage.

v   Attainable standard or currently standard: By definition, it is a standard which can be attained if a standard unit of work is carried out efficiently, a material properly used. Allowances are made for normal losses waste and machine idle time. According to T. Lucey (1993: 366) attainable standard provide a realistic target but should be tough rather than cheap so that its achievement must be worked for it standard for reasons. It is suitable both for planning controlling and motivating functions.

Furthermore, attainable standards operate on the level of attainment which is possible under efficient working management. This level is usually the most satisfactory and more realistic.

v   Loose standard is carelessly and narrowly set suck that in the long run, it will produce inefficiencies. If variance are always favourable, there will be no pressure on management to improve are most easily attainable as dexterity will be lost. Denomination rather than motivation will be the pay of implementation of such a standard.

v   Historical standard is based on the past achievements over the years. The disadvantage is that the inefficiencies of the past year will be introduced as being normal. Such will be counter productive and is found to reduce efficiency over a period of time. Historic standards may be useful for planning since the further is unlikely to produce the past but it may be suitable for control as a comparison can be made with previous performance. Its variance through will look fairly insignificant should be watch because small adverse variance in efficiency.

NOTE: The primary purpose of a standard cost system is to keep the unit cost of production as low as possible, given the current state of the industry. The standard cost does not keep the unit cost of production at a minimum rather the system is made efficiency by the achievement of the workers in using no more than the standard amount of material, labour and overhead to produced the service. Thus, standard cost is a bench mark of good performance that workers strive to achieve. Also worthy of note under standard setting is the fact that standard motivates best when there is a valid participation in their establishment, that is when they are tight but reasonable when there is rapid performance feedback and when the employees reward are tied to success in achieving the standard. The culmination of the standard setting process is the preparation of the standard cost for the product showing the target cost for the following period.

Responsibilities for setting standards ask the question of “who should set the standard?” or what group should be involved during the standard setting stage are all that bug members of organization. The answer is found in the premise that the line managers who have to work with and accept the standard must be involved in establishing them. These mangers and their supervisor have the ultimate responsibility for setting the standard work study staff, accountants and other specialist provide technical support and information, but do not set the standards. Setting standards is the responsibility of the line managers and their superior.

2.3.2 REVISION OF STANDARDS

The process of setting standard, results to the establishment of the standard cost of the product. This is achieved using the standard cost card- the predetermined estimate of what one unit of product should cost if produced efficiently. It includes detailed estimates of material quantities and price, labour qualities and price and overhead for efficiency against which actual quantities and cost are compared. The standard cost description is at the heart of a standard cost system.

Due to obvious reasons and such factors as changes in the prices of raw materials, production materials and quality of component mix, it is a common practice for all standard costs to be revised together at regular or periodical intervals. This will ensure that the operation meet with current and internal or exogenous need. A period such as six or twelve months is suggested rather than on an individual random basis. A typical policy is to revise the standards whenever quantity or price change significantly can result in the standard becoming unfair for evaluating performance.

Difficulties arises with two frequently revision of standards. Consequently, it is recommended as is common practice to revise them on a periodic basis, half a year or yearly.

Behavioral aspect of standard costing: Thus, like budgeting is very absolutely upon the people to whom it is meant for i.e. the people who have worked towards budgets and standard cost. Production workers will regard any form of performance evaluation with deep suspicion of a cost conscious, positive altitude is to be developed then close attention must be paid to the Behavioral aspect of the system.

If the system is not acceptable by the people involved, there is no way it will be workable. Therefore to ensure their acceptance of the system, appropriate participation, realistic standards, prompt and accurate reporting, no under pressure or force should be used.

2.4 CONCEPT AND USE OF VARIANCE ANALYSIS

The whole issue under standard cost control technique, rest on variance analysis.

According to T. Lucey (1993:374) variance is rarely used on its own. It is usually qualified in some way such as revision variance, labour efficiently variance etc. variance may arise from differences between standard and actual qualities difference between standard and actual price. There are causes of variance and management is to investigate and end reason for the differences that occur. There are many variances used in fraction to serve the particular need of organisation or a certain industry. There are a number of variances common to many industries and are listed as follows:

(i)         Direct material total variance

v    Direct material price variance

v    Direct material usage variance

v    Direct material mix variance

v    Direct material yield variance

(ii)        Direct Labour rate variance

v    Direct labour rate variance

v    Direct labour efficiency variance

These forms the sum of all variance put out in the appendix two attached. A variance is adverse where actual cost is greater than standard or may be favourable that is where actual is less than standard. Another way of expressing adverse and favourable variance is as minus (-) or plus (+) variance respectively. Variance analysis is a process by which variance is broken down into different elements and an analysis of performance by means of variance. It is used to promote management action at the earliest possible stages, thus, the use of variance analysis pin point’s responsibilities and evaluates people efficiency in their performance of operation. It also assists the control of cost in terms of various responsibilities. Variance analysis also be described as the process of directing attention to the cause of standard performances. It gives warning and indications about areas of inadequacy and areas needing correction. It either solves the neither problem nor does it establishes the reason behind the variance but simply exposes them for management to work on.

Outlining the purpose of variance Analysis Osisioma (1996: 126) and T. Lucey (1993:374) Share the same view that the purpose of variance analysis is simply and it is to provide practical pointer to the causes of off standard performance so that management can improve operation and assess peoples efficiency towards increasing efficiency in the performance of operations utilize resources more efficiently and reduce cost.

From the foregoing, the process of variance analysis should be as follows:

v   Making it understandable not overly elaborate variance analysis.

v   The variance should be acted upon.

v   They should be calculated not too long after the event.

v   The types of variance which are identified must be these which fulfill the needs of the organisation.

v   The usefulness should be the only criterion for calculation of a variance, if is not useful to management, it should not be produced and it is only when the qualities are present that the central purpose of standard costing and control by variance analysis is achieved.

Typical questions which can help in discovering these facts and which will make variance analysis more useful are as follows:

v   First on the surface, is it adverse or favourable the occurrence of your standard for comparison, then your method of data collection and computation?

v   Is there any relationship between the variances for example, a favourable material price variance (because the material was of low quality) can lead to adverse material usage and labour variance because of recorded wastages owing to that initial low quality) can further information other than merely the variance be provided for management?

Management is interested not merely in calculated figures but in finding the reason for the variance and to take action in buying operation to conform to plan. Any information other than calculated figures will make the process more useful.

v   Is the variance analysis significant and worth reporting? A significant variance is that which is of such magnetite, relative to the standard or budget that will influence management’s action and decision. As an example, Lucey (1993:413) points that variance arising from failure to meet a correctly set and agreed standard, of sufficient magnitude are the only variance that will require further investigation and possibly management action.

v   Are the variances being reported quickly enough, to the right people, in sufficient or too much detail, with explanatory notes? All this point matters a lot and they determine to a great extent the usefulness of variance analysis.

2.5 DESCRIPTION OF VARIANCE

It has been earlier explained under the concept and the use of variance analysis that variance explain the differences between actual and expected result. The expected results are the set standard either as standard cost or standard revenue.

There are also various divisions and subdivisions of variance as there are many variances used in practice. The presentation of the main variance and sub-analysis is described by Muonwuba (1998:124) as the family of variance.

For general guide and purpose of this study, variance common to any industry are categorized into three viz.

v   Variable cost variance

v   Fixed cost variance

v   Sale variance

VARIABLE COST VARIANCE

(a)        Direct material cost variance

(b)       Direct labour cost variance

(c)        Overhead cost variance, each with its subdivision

(a) Direct material cost variance is the difference between the standard cost of standard material specified for the work produced and the actual cost of standard usage output-actual cost of actual usage. For short MCV = (SP * SQ) – (AP * AQ) Employing a general illustration to solve for MCV and other following variance. Let’s assume that the standard specification for a job material is 100 units of output. The standard price is 50 per kg. An actual quantity of 200kg of material was issued to make 2000 units but only 1900 units were actually produced. The actual price was N45 per kg.

REQUIRES

Calculate the material cost variance and show how mush of this is due to the purchasing price of the material and how mush is due to the usage of material in the procedure comment on all the cases and the native of the variance.

1)      MCV = (SP * SQ) – (AP * AQ)

= (N50 * 1900) – (N45 * 2000)

= (950 – N 900) = N50 (F)

(2) Direct material price variance is the difference between the standard price and actual purchase price of the actual quality of material. It can be calculated either at the time of purchase or at the time of usage actual cost actual usage.

MPV = (SP * AQ) – (AP * AQ)

MPV = (N50 * 2000) – (N45 * 2000)

= N1000 – N 900

N100 (F)

REMARK: The variance in the above working (1 & 2) is favourable because the work actually cost less that it should have cost (i.e. the cost is less than the standard specified).

(3) Direct material usage variance is the difference between the standard specified for the actual production and the quality used at standard purchase price. (I.e. standard usage cost of usage)

MUV = SP (SQ – AQ) or (SP * SQ) – (SP * AQ)

= (N50 * 1900) – (N50 * 2000)

= N950 – N1000

= N50 (A)

REMARK: The variance in the above working is adverse because the material used more than the standard specified for work.

NOTE: An arithmetical check of MCV = MPV + MUR

= N100 (F) + N50 (A) = N50 (F) correct

(b) Direct labour cost variance is the difference between the standard and direct labour cost and the actual direct labour cost incurred for the production achieved.

LCV = Standard that the labour specified for a job is 100 hours labour for 100 unit of output; the standard wage rate is N3.00 per hour. The actual time worked on the product was 94 hours at N3.20 per hour and 2 hours were lost due to power failure (waiting time is being paid at ordinary rate). What is the labour cost variance and how the efficiency of the work force and how mush is due to ideal time.

4) Direct Labour cost variance       LCV = (SR * SQ) – (AR *AQ)

= (N3.00 * 100 hours) – (N3.20 * (94 + 2) hrs paid

=N300 – N307.20

= N7.20 (A)

REMARKS: The variance is adverse because the work paid for including idle time, cost more than it should have cost according to the standard specification.

5) Direct labour rate variance is the difference between the standard and the actual direct labour rate per hour for the total hour worked. It reveals the deviation between the actual hours paid and the actual rate for the hours paid from the standard rate.

LRV = Standard cost of actual hours – actual cost of actual hours. In short LRV = (SR – AH) – (AR – AH) or AH (SR – AR)

= (N3.00 X 96) – (3.20 X 96)

= N288 – N307.26

= N19.20 (A)

6) Direct labour efficiency variance is the difference between the standard hours for the actual production achieved and the hours actually worked, valued at the standard labour rate. It reveals the development of the standard labour rate. It reveals the deviation of the standard cost of actual time taken in production from the standard cost of standard hours specified for the work.

LEV = Standard cost of standard labour rate – standard cost of actual time. In short LEN = SR (SQ- AQ) or (SR * SQ) – (SR * PQ)

= (N3 * 100 HRS) – N3 * 94HRS)

= N300 – N282

= N18 (F)

7) Labour idle time variance is the lost hours (waiting time) at standard labour rate. This variance is always adverse because it arises from lost resources. LITV = Standard rate of hours paid for but not worked.

LITV = N3, 00 (96-95 HRS)

= N3 * 2hrs lost

= N6.00 (A)

NOTE: An arithmetical check for direct labour variance

LCV = LRV + LE + LITV

= N19.20 (A) N18 (F) + N6.00 (A)

= N7.20 (A) ………………. Confirmed

c) Overhead cost variance: These are complicated because they involve comparison of recovery of overhead and actual spending overhead. This recovery is of two activities, they are:

i) Amount to be spent on overhead

ii) The output produced and the time involve in production

The budget rate of overhead recovery is given by the forecast spending that is budgeted expenditure divided by the forecast volume that is budgeted expenditure divided by the forecast spending that is budget output or hours. It follows that if the actual figures when ascertaining are different from the forecast, then an under or over recoveries are overhead cost variance.
To illustrate overhead cost variance assumes the following:

Variance overhead = N40, 000

Budgeted fixed overhead = N20, 000

Budgeted standard hours for production 40,000hrs actual result achieved against this targeted variable overhead incurred is N37,000 fixed overhead incurred = N21,00 actual hours worked =N37 hours, actual standard hours for production = N38,50hrs.

Required: calculate the overhead cost variance as set out in the relationship diagram above.

8) Variable overhead recovery rate = Total   variable overhead

Standard production hours

N49, 000

40,000hrs      = N1 per hours

 

Fixed overhead recovery rate = Total fixed overhead

Standard production hours

 

N20, 000

40,000hrs         = N0.50 per hour

Therefore, recovery for all overhead = N1.50 per hour Basic overhead cost variance is the difference between the standard cost specified for the production achieved and the actual overhead cost incurred. This gives the deviation between the total overhead incurred on both variable and fixed overhead and total overhead recovered at standard rate.

9) Total overhead variance = standard recover for output-actual overhead incurred.

TOV = (N57 * 3,500 – 38,000 + 21,000)

= N57, 750 – N59, 000

= N1, 250 (A)

REMARKS: The variance is subdivided into two namely the fixed component and the variable component

Using the illustrated figure:

10) Total variable overhead variance

TVOV = (N1.00 * 38,500 – 38,000)

= N38, 500 – 38,000

= N500 (F)

11) Total fixed overhead variance

TFOV = (N0.50 * 38,000)

= 19,125 – N21, 000)

= N1750 (A)

CHECK:

TOV = TVO + TFOV

= 500 (F) + 1,750 (A)

= N1, 250 (A) ………………..Confirmed

12) Variance overhead expenditure variance the difference between the actual rate of hours actually worked and standard rate of actual hours worked. It reveals the deviation between the actual variable allowed for a standard.

VOEV = Standard recovery for actual hours worked-actual variable overhead incurred or sample (AR – SR) AH. (Actual hours minus standard rate) multiply by actual hours therefore, VOEV = (N1.00 * 37,000 – 38,000)

= N30, 000 – 38,000

= N1000 (A)

13) Variable overhead efficiency variance is the difference between actual standard hour rate and the standard rate for standard hours given as SR (AH – SH). It reveals hours worked variable overhead recovered on standard hours produced.

Therefore, VOEFV = N1.00 * 38,500 – N37, 000

= 38,500 – 37,000

= N1500 (F)

REMARK: The variance is favourable because the work produced in standard hours is greater than the time taken to complete that work. Total variable overhead variance

TVOV =VOEXV + VOFFE

= N1, 000 (A) + 1,500 (F)

=N500 (F)

THE FIXED COST VARIANCE

        The fixed variance is the amount of under or over-absorbed fixed overhead. The concept of over and under absorption simply means the allocation of some measures of the fixed overhead cost to a products overhead cost in which case, all the overheads would be apportioned and absorbed by the variance centres. If the actual figures, we have a case of under absorption of overhead, the volume variance is also divided further into the capacity variance and efficiency variances

14) Fixed overhead expenditure variance is the difference between the budgeted fixed overhead and actual fixed overhead incurred

Therefore, FOEXV = Budgeted expenditure – actual expenditure

= N20, 000 – N21, 000

=N1, 000 (A)

15) Fixed overhead volume analysis is the different between fixed overhead recovered from standard hours produced.

FOVV = SR (SH – BH)

= (0.50 * 38,500) – 0.50 * 40,000

= 19,250 – 20000

=N750 (A)

REMARKS: The variance is adverse because it is only possible to recover on volume produced and the budgeted target of 38500 standard hours not achieved instead it took extra 1500 hours for the same feat to happen.

16) Fixed overhead capacity variance is the different between the fixed overheads recovered on budgeted hours. It is given by the formula        FOCV = SR (AH – BH) or (SR * AH) – (AR * BH)

= (0.50 *40000) – (0.50 * 37000)

= N20000 – N18500

= N1500 (F)

REMARKS: The variance is favourable because the work produced in standard hours is greater than hours taken to complete the work.

SALES VARIANCE

        As the cost variance arises due to differences in price or in quality of cost elements from specified standards, so also do sale variance suits the service sector better because they record the sales of their service and some times product two

According to T. Lucey (1993:406) historically various analysis in the sales area commenced with variance based on sale turn over. Nowadays, it is ideally to be supplied by detailed sale analysis not through variance analysis.

Sales variances are commenced with revenue rather than cost, as a result, the adverse or favourable aspect is reversed. All variance from specified standard affects actual profit. To describe the components of sales variance, assume the following:

Budgeted sales = 30,000 units

Standard total cost = N1.50 per unit

Standard profit = N0.50 per unit

Actual sales = 28,500 unit

Actual selling price = N2.30 per unit

17) Total sale variance = (Budgeted revenue of standard budgeted cost – standard of budgeted volume – actual volume of selling price – standard cost of actual volume)

Therefore, TSV = (30000 * N2) – (30000 – N1.50) – (28500 * N2.30) – (28300 * N1.50)

= (60000 – 45000) – (65550 – 42750)

= N15000 – N22800

= N7800 (F)

REMARKS: It is favourable because the actual profit is greater and adverse condition is reversed to favourable.

18) Sale or selling price variance: This is the difference between the actual selling price per unit and standard selling price per unit multiplied by the actual quantity sold. It gives the deviation of the revenue from the actual or sells at actual price and from the actual sales at the specified standard.

SPV = AQ (SP – AP)

= (28500 * N2) – (28500 * N2.30)

= N57000 – 65550

= N8550 (F)

19) Sale volume variance or sale margin variance or sale profit variance: This is the difference between the actual selling price per unit and standard selling price per unit multiplied by the actual quantity sold, given by:  SVV = SP (BS – AS). It gives the difference between the standard project from the budgeted sales and standard profit from the actual sales. An increase or decrease in sales volume will only affect the profit margin assuming there are cost variance thus SVV = (budgeted sales * standard profit – actual sales * standard profit)

SVV = (30000 * 0.50) – (28500 * 0.50)

= N15000 – N14250

= N750 (A)

REMARKS: The variance is adverse because the profit margin has been earned on 1500 sales unit (i.e. 30000 – 28500) as budgeted

The total sale variance could be summarized by the sub-variance as follows:

TSV= SPV + SVV

= N8550 (F) + N750 (A)

= N7800 (F) ………………Confirmed.

 

2.6 STANDARD COSTING IN THE SERVICE SECTOR

Service sector industries or rather organisation whose finished goods is in form of service or both product and services such as government or public sector businesses, car hire operations, transportation, computing, consultancy firm, audit firm etc. make use of standard costing for setting goals or incentive for improvement of performances. Being able to perform up to a standard that is present is fulfilling paragraph 42 of the management accounting guidelines which recognizes that standard costing has limited use in service industries of its potential rather than its lack of involvement.

One barrier to the application of standard costing in service industries is the full costing approach, which recovers least one element of fired cost by the means of an absorption system. Thus brings to play that variance such as capacity, usage variance overhead recovery variance etc, which are advanced and sophisticated. Most people who operate standard costing do not consider the technique that could be applied only as far as contribution level on sales and variable cost. If this barrier could be broken, it would see to the system becoming relevant and useful to producing meaning management information.

2.6.1 BENEFIT OF STANDARD COSTING SYSTEM TO SERVICE INDUSTRIES

Service oriented organization such as auditing firm etc can benefit immensely from system as follows:

v The system aids management to batter decisions

v It services as a focal point of management information system.

v It aids in the determination of sale policy and assist in making standard fixed prices.

v It provides more detailed control information and is best suited to parts of the industries where completion has been introduced.

v As far as the appreciate condition exits (that is stability and repletion) standard costing can be appropriate in the service industries in cases of adverse variance at any point of a given problem which perhaps may be rectified before it becomes significant.

2.6.2 HINDRANCES TO APPLICATION OF STANDARD COSTING IN SEEVICE INDUSTRIES

With the high cost structure, which usually characterized service industries, cost control is relatively unimportant and the accountant will not prove him-self cost effective unless he looks for ways of influencing volume and resource utilization. Application of the concept in service industries is more difficult than it sounds because each has a different characteristics and a little in common between them. Such features are necessary to apply the total package like standard components; processes, consistence unit of volume etc do not apply to a high proportion of present day business. Few organizations seem to have the simple characteristics required to adopt the system standard unit of capable of being specified in precise term. Even where the calculation is there, there is doubt about its usefulness and objectives. Many organizations “worship” the wonderful calculation and have nothing to do further with it as a result of lack of experience.

2.6.3 SUMMARY AND SUGGESTED SOLUTION

There is no gain emphasizing that some organization lends them to the standard costing approach more than others. Service organisations rely heavily on clerical work measured, which can be linked to a standard costing application. The installation of standard costing cost control by use of variance analysis in these industries is a challenge.

Organisation should be worked upon to have the feature necessary to apply full standard costing. With this, the adoption of these standard-costing principles to them will be meaning and easily absorbed. There are good things about as a philosophy and concept to be applied to relevant context

2.7 VARIANCE INVESTIGATION

“It follows that overly elaborated variance which are not acted upon and variance which are calculated long after the event does not fulfill the central purpose of standard costing”. Onyema (1998)

The essence of variance analysis is to produce into the cause of the deviation.

According to T Lucey (1993:413) variance may arise for a number of reasons, which the following are most important.

v Failure to meet a currently set and agreed standard.

v An incorrect set or out of data standard.

v Random deviation.

Whichever is the reason; management performs the tack of controlling such occurrence and put operations in line with plan. To do this each variance should be placed. Most of the time, there is a different cause that produces the different effects.

2.7.1 CONTROL BY VARIANCE ANALYSIS

a) Possible causes of variance direct expenses

v   Material price variance may be caused by inefficient purchasing i.e. buying in the wrong market at the wrong price or purchase the wrong quality or quantity of material. Others are rise in prices, no quantity discounts, thus resulting in greater changes in purchasing price per unit, increase in delivery changes.

v   Material usage variance may arise through wrong method of work, use of inferior materials, untrained employees, and wrong quality of material or different from the specified standard.

v   Labour efficiency variance may result out of untrained or badly supervised workers, the lack of incentive scheme, and outdated machinery for method labour turnover.

v   Labour ideal time variance arises through management inability to provide the condition for continuity of works example point are possible reasons for adverse variance, but it the opposite apply i.e. correct price and better variance are favourable or adverse, management should investigate the cause. When this is revealed, remedial action should be taken to reverse the adverse tread or monitoring to maintain a favourable tread will be put in place.

b) Possible causes of variance: Indirect expenses

v   Variance overhead expenditure: Variance is the result of the actual expenditure being different from the recovery derived from the actual hours worked. Actual spending on items such as heating, power, indirect wages etc. may be greater or less than planned hours due to strike etc.

v   Variance overhead efficiency variance is caused by a productivity difference. A favourable variance may be the result of an effective hour’s system or good-working conditions while on adverse variance usually indicates badly trained workers, inefficient machinery or poor supervision.

v   Fixed overhead expenditure variance is the result of any over or under spending on item of a fixed nature such as rent, rates, insurance etc.

v   Fixed overhead capacity variance shows the usage of available capacity of the factory. If worked fall short of the available  hours, an adverse variance will show how much this has cost, while every time working could be reflected in a favourable variance.

v   Fixed overhead efficiency variance is a productivity difference. The variance shows the loss and gain brought about by absorbing overheads of a fixed nature over a greater or lesser volume of output expressed un standard hour of work

c) Possible causes of sales variance:

v Sales price variance (SPV): Price changes due to economic conditions, cost increase, competition in the market etc.

v   Sales volume variance (SVV): Volume changes due to demand, customer’s preference, competition, salesman incentives etc.

Conclusively, variance should not only be observed but should be investigated where appropriate, managers should be accountable for the variance and should be required to explain the reason for relevant variance occurring. Generally, it has been assumed that virtually all variance of accountants have begun to question the viability of procedure, hence the need to evaluate the cost of investigation.

2.8 COST OF VARIANCE INVESTIGATION

An investigation of a variance can be a costly, time consuming operation, so it is essential to ask the question: is it cost effective to investigate variance? Obviously, if the cost of the investigation exceeds the amount of the variance, then it could not be wise to venture. How then can one ascertain the average cost of an investigation? What is the amount of a variance that will warrant an investigation, or is it all variance? The use of variance analysis yield itself to the principle of management by exception (MBE). The aspect of relevancy of the concept of MBE is that reports should emphasize exceptional unusual matters. If plan are well prepared, management may expect activities to proceed according to plan. The reporting system should provide some basis for the manager to separate significant favourable or unfavourable deviations, which should be investigated further. According to Decoster and Shauger (1979:364) ideally reporting system would report deviation from plan cased upon the probability of their occurrences on past experience and nature of the cost; it would be trested as exceptional. The question still bug: what is the range of the “accepted standard”? What limits are the probability of their occurrence?

Owler and Brown (1984:596) are of the opinion that management may decide to leave the decision of management accountants. They suggested that some basic principle should be established so that every member of staff is quite clear as the procedures to follow. They outlined a number of factors, which must be carefully considered especially the behavioral aspect of management, which consider staff relationship.

2.8.1 FACTORS TO CONSIDER IN ESTABLISHING A PROCEDURE FOR INVESTIGATION OF VARIANCE

The relative size of the variance: It is important that the standard calculated for comparison is relative to the actual achievement. Time and labour rate to be compared with the units of actual work did etc. clearly, this will very according to the nature and size of the company. It may be product to determine percentage figure, say 10% deviation will be investigate techniques such as measurement by standard deviation, may be needed to determine which variance should be investigated from there, only the variance which were outside the acceptance range would be investigated and one based on the theory of probability would be usually the minority.

This step will minimize the number of variance to be investigation accordingly. At the share time, it is ensuring those variance that are important are not overlooked. While both favourable and adverse variance should be considered, it is more likely that large adverse variance will receive priority in investigation.

Where we have controllable and uncontrollable variances, most certainly a controllable variance should receive a priority treatment. Averaging the cost of investigation over as reasonable period of time off set against the potential savings, which may accrue from the results of an investigation potential saving can be very high, if for example it is found carelessness, which should be rectified relatively easily.

Investigation of variance is still an important task of management accountant, but it is his interest to ensure that only relatively important variance is thoroughly investigated. While cost of investigation savings which may be achieved must be borne in mind, behavioral aspects are important and every attempt should be made to ensure that co-operation is obtained from all concerned in operating the system. Unless managers understand and appreciate the relevance of variance analysis, the system will not operate effectively.

2.9 RESPONSIBILITY ACCOUNTING

This is also called profitability accounting or actively accounting. Drury J. C. (1985:180) define responsibility accounting as the process of presenting detailed control information on a short term operating activities where the accountants present performance report normally at monthly intervals, which compares the actual and budgeted works of accounting designed to present managers with control/ measures relating to their individual field of responsibility.

It recognizes various decision centre throughout an organization and traces cost and revenue to the individual managers who are primary responsible for making decision about them. This means that responsibility accounting is not mush and not less than accounting system while tries to locate and control cost performance by budget centres and makes a managed activity with equal measure of responsibility and accounting of good performance. The sphere of responsibility gives the organization subdivision and processes, which are in the nature of cost centres or budget center or decision centres. Theses are simple a production or service location, function activity or item of equipment whose cost may be attributed to involving section, inspection etc.

Responsibility accounting comprises of costing and budgetary control. It status that variance should be calculated in accordance with responsibilities is the total division of the direct material cost variance, that is the total difference in material cost between actual and standard. Lucey (1995:374), Continuing, this is composed of usage component which is usually deemed the responsibility of a foreman and price component which is usually deemed the responsibility of a buyer. Accordingly, a usual variance and a price variance needed to be calculated to how mush of total different is attributed to either person

Suffice it to note here that the assignment of clear-cut responsibilities for variance is an ideal found to be difficult to achieve in practice. Interrelationship and interdependence makes the process much more complex than basis theory.

Drury (1985) Suggest that when operating a system of responsibility accounting that it is important to determine the lowest level of responsibility for reporting process, the information to be reported, and the frequency of the reporting.

This problem should be resoled on a cost versus benefit basic.

The process takes the following specific step and procedure:

v Clear designation of an organizational structure with well-defined budget/cost centres, and the analysis of cost performance data in terms of budget/cost centres and the analysis of cost performance data in terms of budget centres.

v  Recording and tracing of revenues and cost to the responsible individual at the lowest level of the organization.

v Changing only controllable cost and their associated variance to budget centres. These controllable cost are “those cost tat are directly influenced by a given manager within a given time span” Osisioma quoting Horngreen in Osisioma (1996:272)

v Establishing responsibility for every cost and for the occurrence of such cost. Challenging cost reports to responsible mangers on whose shoulders devolve the action to correct deviation from budgeted standard.

v Establishing the feedback reporting system/mechanism where deviations are reported as they occur or even before they occurred, for fast remedial action.

3.0 RESEARCH DESIGN AND METHODOLOGY

The methodology adopted was designed in such manner as to collect data that provide an in-depth knowledge of using the techniques of variance analysis to control cost, which is the major feature of the standard costing system. The methodology aimed at collecting necessary information from all categories of person in the organization directly or indirectly concerned. This made the data to be free from bias. This chapter will focus on the methods and procedure adopted for the purpose of achieving these aim. The presentation is made under the subheading:

v Research design

v Description of the population

v Sample size

v Source of data collection description of questionnaire

v Method of data analysis

v Method of testing hypothesis

3.1 RESEARCH DESIGN

This research is designed to study the use of variance analysis in service organisation to control cost. Case studies of organization were selected from Anambra State. The following subdivision discuses how and what came out of the research proper.

3.2 DESCRIPTION OF THE POPULATION

Generally, population is described as the totality of all elements subjects or member that passes a specified characteristics or the group to which influence are made. The population size for this research work was therefore taken to include the totality of all categories of people involved in decision making accounting, marketing operations in the case study organisation. Of course only competent enough to supply the information required were sought and used.

The population used for the study was ten (10) accounts and audit personnel, six (6) report recording personnel, seven (7) supervision personnel and four (4) production personnel in that category on the whole. A total of twenty seven (27) persons responded from the two (2) organisations.

3.3 SAMPLE SIZE

The sample selection for this research is taken to be a cross section of all categories of people involved viz. management, accounting, report recording, supervision and actual production in the two (2) selected organizations.

Due care was taken to see that the sample drawn was not biased with due consideration for cost, preclusion and usefulness.

v However, in the final sample, the researcher made sure that blank vacant responses and other forms of biased sample were rejected out rightly. There was only one (1) scantily filled and two (2) unreturned questionnaire. Out of thirty questionnaires sent out, only twenty seven (27) were relevant for the study. The entire questionnaire confirmed that the application of variance analysis technique in services industries is possible. The sample selection on procedure have therefore taken a proportion of the population as being representative of the total population and using that to make generalization and inference.

3.4 SOURCES OF DATA COLLECTION

Wide range source were used to obtain reliable information for this study. Such source helps immensely to measure intelligence and unprejudiced response of the respondents. Both primary and secondary sources of data were employed.

v   Primary source: This consists of raw data or information collected directly from the field of study, by way of questionnaire method.

v   Secondary source: These are already processed information used for inference for which that data is meant. In this research study, the secondary source of data include the consultation of published materials, textbooks, research projects, journals, company publication, new bulletins of professional bodies and dictionary. The research therefore made use of literature related to this research work as secondary data.

3.5 DESCRIPTION OF QUESTIONNAIRE

Objectivity and ease was the main thrust of the questionnaire used. The question on his question consists of one (1) major form, which is close ended question.

v   The close ended questions popularity known as dichotomous question restricting the respondents to only yes/no answer or few options of agree, disagree and I don’t know were added to minimize answers of not being clear with or lack of knowledge of the question.

3.6 METHOD OF DATA ANALYSIS

The procedure started with editing of the information obtained by the researcher. This was necessary as it helped to eliminate errors in the raw data.

The data were subjected to completeness and consistency tests. One (1) scantily filled and two (2) unreturned questionnaires were rejected; the data were tabulated and followed by analysis and interpretation of the data. All information obtained was analyzed and was used to test hypothesis and this helped in arriving at a correct view and findings. Simple percentage and frequency tables were used.

3.7 METHOD OF TSTING HYPOTHESIS

In testing the hypothesis, the chi-square was the analytical tool employed. The hypothesis tested were three viz.

v   H0: Efficient and tactful application of standard costing and variance technique do not significantly help to enhance the cost saving scheme of the organization.

v   H1: Efficient and tactful application of standard costing and variance technique significantly help to enhance the cost saving scheme of the organization.

v   H0: Investigation of variance does not stimulate the detection of areas of loopholes in procurement, production and selling operation.

v   H1: Investigation of variance stimulates the detection of areas of loopholes in procurement, production and selling operation.

v H0: Management has not engaged an effective variance analysis as a means of cost control.

v H1: Management has engaged an effective variance analysis as a means of control.

STATISTICAL TOOL USED IN TESTING THE HYPOTHESIS

Group of questions in the questionnaire were designed to back up each hypothesis and the questions covers each hypothesis. Owing to the size of the sample of this study (i.e. a sample of thirty), the chi-square (X2) is the test statistical tool to be used and was used at 95% confidence level and at 5% level of tolerable error.

Hence X = 0.05 (which is 1.0-0.95)

 

n

Thus X2 = å    (oi-ei) 2

n-1      ei

Where:      å   = Summation

oi   = Observed frequency

ei   = Expected frequency

xo2 = Computed chi-square

xe2 = Expected chi-square at 5% level of tolerable error.

Decision criteria

If xe2 > xo2 —————– Accept H0

(Accept the null hypothesis H0 and Reject the alternative hypothesis H1)

If xe2 < xo2 —————– Reject H0

(Reject the null hypothesis H0 and accept the alternative hypothesis H1)

4.1 DATA PRESENRTATION AND ANALYSIS

The relevant data collected from respondents are presented and analysed. A total of 30 questionnaires were distributed to the staff of various departments in the two (2) selected companies. The data collected will be presented and analysed using the three (3) hypothesis earlier formulated in chapter one as guidelines.

Percentage table are used to present the result, followed by a brief discussion of each result.

Response rate: returned relevant questionnaires *   100

Total number distributed             1

 

= 27 * 100

30      1

 

= 90%

 

Non-Response rate = 100%-response rate

= 100% – 90% = 10% Ans.

4.2 TABLETION OF RESULTS

Table 4.1: Gender

OptionsRespondentsPercentage (%)
Male

19

70

Female

8

30

Total

27

100

 

Table 4.1 shows that 70% of the respondents are male and 30% are female. This shows that, male are more involved in the standard costing and variance analysis process than their female.

Table 4.2: Age

OptionsRespondentsPercentages
Below 25 years

3

11

25-40 years

19

70

Above 40 years

5

19

Total

27

100

 

From the above table 11% of the respondents are below 25 years of age, 70% are between 25 and 40 years of age and 19% are above 40 Years of age.

Table 4.3: Working experience

OptionsRespondentsPercentages
Less than 10 Years

16

59.3

10-20 years

9

33.3

Above 20 years

2

7.4

Total

27

100

 

From the above table 59% have worked for their various companies less than 0 years; 33.3%, between 10-20 years and 7.4%, above 20 years. It can be deduced that majority of the respondents have served long in the company to be able to give a reliable information concerning the company.

Table 4.4: Departments

OptionsRespondentsPercentages
Account

10

37

Report recording

6

22

Supervision

7

26

Production

4

15

Total

27

100

 

From the above table 37% or the respondent are from account department, 22% from report recording, 26% from supervision and 15 from production department. This will give a good representation of the staff’s opinion in each of these departments.

Table 4.5: I have heard of standard costing and variance analysis.

 

OptionsRespondentsPercentages
True

25

93

False

Don’t know

2

7

Total

27

100

 

From the table above, 93% of the respondents have heard of standard costing and variance analysis while 7% are not sure of coming across it. This shows that majority have in-dept knowledge about standard costing and variance analysis.

Table 4.6: Standard costing and variance analysis is practicable in services industries.

OptionsRespondentsPercentage
True

22

82

False

3

11

Don’t know

2

7

Total

27

100

 

 

 

From above, 82% of the respondents favour the practicability of standard costing and variance analysis in services industries while 11% does not favour 7% do not know. This shows that the majority favours it.

Table 4.7: Use of variance analysis and standard costing enhances cost saving of a service organization.

OptionsRespondentsPercentage
True

20

74

False

5

19

Don’t know

2

7

Total

27

100

From the table above, 74% of the respondents are of the opinion that standard costing and variance analysis enhances cost savings while 19% opposed and 19% do not know. The majority shows that standard costing and variance analysis enhances cost savings.

Table 4.8: Setting of standard and recording deviation from standard enhances company’s cost saving scheme.

OptionsRespondentsPercentage
True

21

79

False

4

15

Don’t know

2

7

Total

27

100

 

From the above table, 78% of the respondents accept that setting of standard and recording deviation from standards enhances company’s cost saving scheme while 15% does not and 7% are not sure of it.

From the forgoing, the majority favours it.

Table 4.9: Communicating to responsible personnel the analysis of result variance investigation makes for efficient tactful standard costing system.

OptionsRespondentsPercentage
True

22

82

False

3

11

Don’t know

2

7

Total

27

100

The table above shows that 82% favours the communication of the analysed result variance investigation to responsible personnel for tactful and efficient standard costing system while 11% does not and 7% have no idea.

Table 4.10: Standard monitoring official and workers has cordial relationship.

OptionsRespondentsPercentage
True

15

55

False

7

26

Don’t know

5

19

Total

27

100

 

From the table, 55% of the respondents are aware of the cordial relationship between the standard monitoring official and workers while 26% are of the view that no cordial relationship exist between the two and 19% have no idea of the relationship.

Table 4.11: Management involves variance as a strategy in control of cost.

OptionsRespondentsPercentage
True

21

78

False

4

15

Don’t know

2

7

Total

27

100

 

From the above table, 78% of the respondents agree that management involves variance as a strategy in control of cost while 15% do not agree and 7% have no idea. The majority favours the foregoing.

Table 4.12: The variance being reported, are made available quickly and in sufficient detail to the right people.

OptionsRespondentsPercentage
True

14

52

False

5

19

Don’t know

8

29

Total

27

100

 

The table above shows that 52% of the respondent’s favours availability of the reported variance to the right people while 19% does not and 29% have no idea of it. The majority favours it.

Table 4.13: Your Organization practice variance analysis techniques

OptionsRespondentsPercentage
True

20

74

False

4

15

Don’t know

3

11

Total

27

100

 

The table shows that 74% of the respondent favours the practice of variance analysis techniques in their variance organization while 15% does not and 11% have no idea.

Table 4.14: Your Organization use variance analysis to assess performance levels in various operations

OptionsRespondentsPercentage
True

18

67

False

2

7

Don’t know

7

26

Total

27

100

 

From the table above, 67% of the respondent favours the use of variance analysis to assess performance levels in various operations by their various organizations while 7% does not and 26% have no idea.

Table 4.15: Your Organisation investigates the reason behind actual performance deviating from standard set.

OptionsRespondentsPercentage
True

20

74

False

4

15

Don’t know

3

11

Total

27

100

The table above shows that 74% of the respondents accept that their various organizations investigates the reasons behind actual performance deviating from standard set while 15% does not and 11% have no idea.

Table 4.16: Such investigation help to reveal lapses in operations

OptionsRespondentsPercentage
True

19

70

False

5

19

Don’t know

3

11

Total

27

100

 

The table above shows that 70% of the respondents favour the revealing of lapses in operation by variance investigation

while 19% does not and 11% have no idea.

Table 4.17: The report of variance analysis has been able to expose activity point that falls below standard.

OptionsRespondentsPercentage
True

22

82

False

2

7

Don’t know

3

11

Total

27

100

 

From the table above, 82% of the respondents are of the view that report of variance analysis exposes activity point that falls below standard while 7% does not and 11% have no idea.

Table 4.18: Investigating why variance occurred is necessary

OptionsRespondentsPercentage
Agree

21

78

Disagree

3

11

Neutral

3

11

Total

27

100

 

The table above shows that 11% of the respondents hold the view that it is not necessary investigating why variance occurred, while 78% favours the necessity of investigating it and 11% also have no idea.

Table 4.19: Investigating variance is a costly exercise and increase cost.

OptionsRespondentsPercentage
Agree

7

26

Disagree

15

55

Neutral

5

19

Total

27

100

 

From above, 26% agrees that variance investigation is a costly exercise to increase cost while 55% disagrees and 19% have no idea.

Table 4.20: Variance analysis technique is capable of dictating whether performance is worsening or improving

OptionsRespondentsPercentage
Agree

24

89

Disagree

1

4

Neutral

2

7

Total

27

100

 

The table above shows that 89% of the respondents agreed that variance analysis technique is capable of dictating whether performance is worsening or improving while 4% disagrees and 7% have no idea.

Table 4.21: If event and results are not properly monitored and their reason of being off standard is not investigated, there is no way cost can be controlled.

OptionsRespondentsPercentage
Agree

17

63

Disagree

4

15

Neutral

6

22

Total

27

100

 

The table above shows that 63% of the respondent favours the monitoring and investigating of off-standard for cost control while 15% disagrees and 22% have no idea.

Table 4.22: Employing the services of cost and management accountants to handle the monitoring of activities and variance investigation

OptionsRespondentsPercentage
Agree

20

74

Disagree

3

11

Neutral

4

15

Total

27

100

 

This shows that 74% of the respondent favours the employment of cost & management accountant to monitor and investigate variance while 11% disagrees and 15% have no idea.

Table 4.23: Discussing the variance being reported and notifying on time the department that is responsible

OptionsRespondentsPercentage
Agree

22

82

Disagree

3

11

Neutral

2

7

Total

27

100

 

From the table above, the majority of the respondents 82% agreed that variance reported should be discussed and notify on time the department responsible while 11% disagree and 7% have no idea of it.

4.3 TEST OF HYPOTHESIS

v Hypothesis One

H0: Efficient and tactful application of standard costing and variance technique do not significantly help to enhance the cost saving scheme of the Organisation.

H1: Efficient and tactful application of standard costing and variance technique significantly help to enhance the cost saving scheme of the Organisation.

Table 4.3.1 Computation of response from relevant questions

Relevant Question NoTrueFalseDon’t knowTotal

7

20

5

2

27

8

21

4

2

27

9

22

3

2

27

10

15

7

5

27

11

21

4

2

27

Total

99

23

13

135

Percentage %

73

17

10

100

 

Based on the above data collected, the hypothesis are tested using Chi-square(X2) as shown below

Step 1: The statistical test is X2 = ån (oi – ei) 2

n=i      ei

 

Step 2: The level of significance used is 5% ie 0.05

Step 3: The degree of freedom is given by (k – 1) where k = number of rows or columns

Therefore k = 3

= 3 -1 = 2

Step 4: The critical value is given as Xe2 = 5.99 (this value was determined from the table of chi-square (x2) Using the degree of freedom and level of significance).

Step 5: Computation of the test statistics

ei = 135 = 45

3

 

Table 4.3.2 Computation of test statistics

OptionsOieiOi-ei(oi-ei)2(oi-ei)2

ei1True

99

45

54

2,916

64.8

2False

23

45

-22

484

10.8

3Don’t know

13

45

-32

1,024

22.8

 Total

135

135

 

4,424

98.4

 

 

Therefore X02 = 98.4

Step 6: Comparing the test statistics with the critical value 98.4 > 5.99

Step 7: Decision

Since the calculated value of X2 is greater that the critical table value, the research reject the null hypothesis and accept the alternative hypothesis.

The researcher therefore, concludes that efficient and tactful application of standard costing and variance technique significantly help to enhance the cost saving scheme of the organization.

v Hypothesis Two

H0: Investigation of variance does not stimulate the detection of areas of loopholes in procurement, production and selling operation.

H1: Investigation of variance stimulates the detection of areas of loopholes in procurement, production and selling operation.

Table 4.3.3 Computation of response from relevant questions

Relevant Question NoTrueFalseDon’t knowTotal
1

12

14

5

8

27

2

13

20

4

3

27

3

14

18

2

7

27

Total

52

11

18

81

Percentages %

64

14

22

100

 

Based on data collected the hypothesis is tested using chi-square (X2) as shown below:

Step 1: The statistical test is X2 = ån (oi – ei) 2

n=i      ei

Step 2: The level of significance used is 5% ie 0.05

Step 3: The degree of freedom is given by (k – 1)

k = 3

Therefore      = 3 -1 = 2

Step 4: The critical value is given as Xe2 = 5.99

Step 5: Computation of the test statistics

ei = 81 = 27

3

Table 4.3.4 Computation of the test statistics

OptionsOiEioi-ei(oi-ei)2(oi-ei)2

ei1True

52

27

25

625

32.15

2False

11

27

-16

256

9.5

3Don’t know

18

27

-9

81

3

 Total

81

81

 

926

35.7

 

 

Step 6: compare the test statistics with the critical value 35.7 > 5.99

Step 7: Decision

Since the calculated value of X2 is greater than critical table value, the researcher rejects the null hypothesis and accepts the alternative hypothesis. The researcher therefore, conclude that investigation of variance stimulate the detection of areas of loopholes in procurement, production and selling operation.

4.3.3 Hypothesis three

H0: Management has not engaged in effective variance analysis as a means of cost control.

H1: Management has engaged in effective variance analysis as a means of cost control.

Table 4.3.5 Computation of response from relevant questions

Relevant Question NoAgreeDisagreeNeutralTotal
1

15

20

4

3

27

2

16

19

5

3

27

3

17

22

2

3

27

4

18

21

3

3

27

5

19

15

7

5

27

6

20

24

1

2

27

7

21

16

4

7

27

8

22

20

3

4

27

Total

157

29

30

216

Percentages %

73

13

14

100

 

Step 1: The statistical test is X2 = ån (oi – ei) 2

n=i      ei

 

Step 2: The level of significance used is 5% ie 0.05

Step 3: The degree of freedom is given by (k – 1)

k = 3

Therefore     = 3 -1 = 2

Step 4: The critical value is given as Xe2 = 5.99

 

Step 5: Computation of the test statistics

ei = 216 = 72

3

Table 4.3.6 Computation of test statistics

OptionsoiEioi-ei(oi-ei)2(oi-ei)2

eiAgree

157

72

85

7,225

100.34

Disagree

29

72

-43

1,849

25.68

Neutral

30

72

-42

1,764

24.5

Total

216

216

150.52

 

 

Therefore X02 = 150.52

Step 6: Compare the test statistics with the critical value

150.52 > 5.99

Step 7: Decision

Since the calculated value of X2 is greater than the critical table value, the researcher rejects null hypothesis as and accepts the alternative hypothesis.

The researcher therefore, concludes that management has engaged in effective variance analysis as a means of cost control.

 

5.0 SUMMARY OF FINDINGS, CONCLUSION AND

      RECOMMENDATIONS

5.1 SUMMARY OF FINDINGS

Use of variance analysis technique as application to control cost in a service organisation has empirically studied. This much desired variance analysis technique process most efficient in organization where a standard costing system is in operation. The following are the findings made on the individual organization under study:

5.1.1 AFRICANA FEB PUBLISHERS LIMITED

v Workability of standard costing system: Management employed variance analysis as an application to control cost. Initial fears was expressed on whether variance analysis technique can work for publishing firms as service industries, it was clear now that specific variance are relevant to them.

v Relating corporate performance: The organisation steadily record good growth, the reason most commonly is that their control purposes in wide event that promote favourable variance on receipt and recoverable are consulted while those event that yield unfavorable variance example bad customers services leading to poor sales turnover is corrected.

5.1.2 LANCASTER OKORO AND CO.

v Workability of standard costing system: Accountants employ variance analysis as an application to cost control initial fears was expressed on whether variance analysis technique can work for audit firms as service industries, it is clear now that specific variance are relevant that arouse their interest: example direct labour rate variance, direct labour efficiency variance etc.

5.2 CONCLUSIONS

Overly elaborated variance analysis which is not understood, variance that are not acted upon and variance which are calculated long after the event do not fulfill the control purpose of standard costing. Trends disclosed (variance) should be quickly investigated and remedial action put in place to steer the operation along the planned path. The main purpose of variance investigation will not be to attach blame to any unit or individual but to correct the overall company’s course.

As have been discussed and critically analysed, management have engaged in effective variance analysis as a means to standard costing and use of variance technique will help significantly to enhance the cost saving scheme of the organization, if not for any reason, the investigation of variance will stimulate the detection of areas of loopholes in any part of the operation in the organisation.

The greater benefit if variance analysis is its stimulation of cost consciousness.

5.3      RECOMMENDATION

Useful Units and structural inches to the effective use of variance analysis to control cost were discovered in the course of this research. The particular interests I recommended for adoption and also for in-depth study are:

v Interaction among variance: This occurs most often example a favourable labour price variance due that is cheap labour which is not skilled is likely to cause unfavorable variance under this point.

a) Direct labour efficiency variance (from more time and wastages) etc.

v Disposition of variance: The variances are to be treated strictly as temporary accounts like each accounting period and the closed out at the end of each accounting period. The research recommends closing the variance accounts directly into cost of service sold. The unfavorable variance represent cost of operating inefficiency relative to the approved standard and this cause cost of goods sold to be higher. The favourable variance could cause it to be lower.

v Revision of standard: The word for number of items or period covered is often, if standard are not revised often enough, they will become outdated, criticized and no longer motivational.

v Computer induced changes: With the present growing emphasis on computer, fundamental changes are needed in the industries. The computer induced changes for auditors and accountants. The electronic data processing is rapidly developing technology and this will cause important changes in the design and role of standard costing system and use of variance analysis technique to control cost absorbed and managed. A suggested example is developing and having new measures and standards (example, On-line Real-time information system) to control key aspects of the daily operation process. This will ensure the reporting of variance more quickly.

Variance Analysis Cost Management, Control – Application In Service Industries

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