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PROJECT TOPIC:APPLICATION OF VARIANCE ANALYSIS AS A COST CONTROL TOOL IN SERVICE INDUSTRIES (A CASE STUDY OF SELECTED SERVICE INDUSTRIES IN ANAMBRA STATE)

APPLICATION OF VARIANCE ANALYSIS AS A COST CONTROL TOOL IN SERVICE INDUSTRIES (A CASE STUDY OF SELECTED SERVICE INDUSTRIES IN ANAMBRA STATE)

 

ABSTRACT

The management activity which ensures that predetermined standards are set, actual activity recorded and comparison made between the two is known as variance Analysis. It is as such fashioned under standard costing system to monitor the on-going activities and get ready to determine the why, the how, the significant and the relationship of the off standard.

This study was conducted using both primary and secondary sources of data. The primary source includes raw data collected directly from the field of study by the way of questionnaire method while the secondary source includes the consultations of published unpublished and print outs from internets and certain recommendation were made among which are: The interaction among variance, Disposition of variance, Revision of standard and the Computer induced changes.

CHAPTER ONE

INTRODUCTION

1.1 OVERVIEW OF THE STUDY

An important feature of meaning of an organization is controlling costs. 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 ‚Äúpredetermined unit cost for the production of units of products under specific working condition‚ÄĚ. 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:

  • Writing it off to profit and loss account.
  • Writing it off to the cost of sales
  • 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 favorable trend that produces favorable 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 analyze 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.

  • How are the principles behind variance analysis understood by responsible personnel of the organization?
  • How realistic and reliable is the standard setting process?
  • How quickly are the variances measured and reported to the individual that will take action?
  • How dedicated is the effort to investigate why the variance resulted?
  • Are their any chain relationship between one variance resulted?
  • How best could the variance be disposed? Does it form part of the double entry system?
  • 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.

 

APPLICATION OF VARIANCE ANALYSIS AS A COST CONTROL TOOL IN SERVICE INDUSTRIES

 

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:

  • 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.

  • 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.

  • 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.

 

APPLICATION OF VARIANCE ANALYSIS AS A COST CONTROL TOOL IN SERVICE INDUSTRIES

 

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