Cost Variance

Cost Variance

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Cost Variance

Cost variance refers to the difference between the budgeted, standard, or planned cost, and the actual amount of cost incurred or sold. Jones (2006) states that cost variance are connected with actual results obtained and the planned measures as well as the differences in performances of both in a company or entity. In my organization, cost variance can be used to obtain flexible budgets, which in turn can be vital for evaluating performance. In the first instance, cost variance will be efficient in planning for direct materials usage in the budget. The direct labor will be factored in and the overhead manufacturing of the units to be produced. This will create a buffer for the management as favorable variance helps the company save on the extra costs. Profits will be realized if the favorable variance accounts for the value of the products and results.

Cost variance in the organization can be used to help predict future trends and costs as well as their control and management. In understanding of the current costs evaluation, the organization’s management can use cost variance in planning of the future without disruptions in the system (Gazely and Lambert, 2006). For example, if the direct materials, labor, and costs are maintained, an increase in activity generally translates to an increase in output. Therefore, the organization’s management can use the results obtained to determine earned value management of similar operation. In addition, a performance indicator can be obtained in terms of percentage to show how much less or more money has been utilized for a planned activity. With the index under scrutiny, the organization’s management can determine if a project is viable, profitable or an expense, which can be avoided.

 

References

Gazely, A. M., & Lambert, M. (2006). Management accounting. London: SAGE Publications.

Jones, M. (2006). Accounting. Chichester, England: Wiley.

 

 

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