Disadvantage of variance analysis

Lengthy Process

The process of establishing standard costs can be lengthy in itself. However, companies still need
to perform variance analysis on actual performance. The process can become complicated and
lengthy, which is a limitation of variance analysis. Companies need to consider the time and
effort it requires to perform variance analysis when using the tool.

Costly Process

As mentioned, variance analysis requires companies to go through a lengthy process. It can

translate to higher costs for companies. The process of calculating variances, investigating and
then reporting them is complicated. Companies must use professional employees to complete the
process and come back with results. It can, therefore, increase costs, which can be higher than
the benefits that companies receive from the process.

Subjective Interpretation

Once companies calculate variances, they need to investigate them to reach a conclusion.
However, this process may result in subjective interpretations. Similarly, companies need to
establish thresholds for the variances that they want to investigate. This judgement can also be
subjective and may result in substantial variances to be overlooked or missed.
Reactive Approach

Unlike some other tools in management accounting, variance analysis takes a reactive approach.
Therefore, this tool cannot be useful in preventing any problems. Variance analysis can only
detect deficiencies or problems once they have occurred. While it is still beneficial for
companies to do so, it can also result in significant losses before companies catch the
deficiencies.

Manipulation Of Data

Variance analysis works through establishing standards that departments within a company must
follow. The problem arises when companies enforce variance analysis strictly. It can result in
data manipulation from departmental managers who would want to show a favourable variance.

AAYUSH PATEL (057)

Some companies may also associate bonuses with favourable variances, which can further
motivate managers to manipulate information.

Service Businesses

Variance analysis works best for production-based companies. For companies in the service
sector, variance analysis provides limited results. While it can still be useful, companies cannot
apply the same variances with services. It is because the structure for service-based businesses
significantly differs from a manufacturing business.
Short-Term Approach

Companies use variance analysis to identify any deficiencies in their processes after every
period. However, this approach may promote a short-term approach towards goals and objectives
rather than a long-term one. While companies want to avoid adverse variances, they are also
necessary for the long-term sometimes. By avoiding these variances, companies can curb their
future growth.

Limited Scope

Variance analysis allows companies to examine specific areas separately. However, some
companies may have complex processes. For example, one product may require input from
various departments. In that case, variance analysis fails to provide meaningful results.
Furthermore, it can also create internal conflicts between managers in case of any adverse
deficiencies.

AAYUSH PATEL (057)