Essay: Variance Analysis for Cost Control
The variance objective function and the approach of variance analysis is risk averse and tends to control the costs specifically with the procurement and the valuation of the stock to be procured. In terms of variance analysis, Markovian control can be used which tends to identify the higher reporting of costs that are actually lower in terms of the cost generation form the cost centers.
This increases the inefficiency of the costing procedures at a company as the lower costs are reported as being higher which leads to inaccurate recording of costs in the books as well as the management focusing on the wrong cost centers for increasing the efficiency of the company. “Sensitivity analysis shows that this observation is reasonably robust with respect to changes in the values of other parameters.” (Dittman & Prakash, 1979)An efficient way of using the variance analysis and the variance techniques of accounting for controlling costs pertain to using a mixed accounting approach. The variance analysis can be used for semi variable costs and the fixed costs that are flexible in nature. Extensions of variance analysis with other basic accounting procedures like standard costing and absorption costing can lead to better and efficient results.
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