Discuss the usage and creation of standard costs by an operation. How are these costs developed? How can they be used in the creation of a forecast? How can these be used in an individual or organizational measurement system?
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Discuss a current business activity that you or your department does that could be improved by leveraging Variance Analysis. Discuss the perspective you could gain, and what a “favorable price” and a “favorable quantity” variance mean in this application.
Post your initial response by Wednesday, midnight of your time zone, and reply to at least 2 of your classmates’ initial posts by Sunday, midnight of your time zone.
We have used variance analysis a few time in our antique car restoration business and it was really eye opening. Variance analysis is the process of identifying, measuring, and investigating the causes of significant differences (variances) between budgeted plans and actual results (1). We failed miserably with our property plant and equipment section of the balance sheet. We usually try and budget around $500 per month or $6,000 per year for new tools and equipment. Last year we spent $14,500 on new equipment which would not be a favorable variance. The main culprit of this was the owner of the company purchasing tools and equipment from sales people that come into the shop selling their latest, greatest product and falls for it hook-line and sinker!! A majority of the stuff purchased, they guys in the shop do not even use. I learned during this process that we do not need to purchase half of the stuff that we do. I would consider this wasteful spending!! In a year that we are purchasing the building and property that we have been renting, we need to really keep an eye on all expenses.
1. Gene Siciliano. Finance for nonfinancial managers, second edition.
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