‭Planning and operational variances.

‭1)‬ ‭Planning variances‬

‭-‬ ‭Variances which have arisen because of inaccurate planning or faulty standards.‬
‭-‬ ‭Compares original standard with a revised standard that should or would have‬
‭used‬
‭-‬ ‭Not controllable by management.‬

‭2)‬ ‭Operational Variances‬

‭-‬ ‭Variances which have been caused adverse or favourable operational‬
‭performance, compared with a standard which has been revised in hindsight‬
‭-‬ ‭Compares actual result with the revised standard.‬
‭-‬ ‭Controllable by management.‬

‭Planning and operational variances for materials and labour‬

‭-‬ ‭A material price planning variance is really useful to provide feedback on ust how skilled‬
‭managers are in estimating future prices.‬

‭-‬ ‭ he operational variance is more meaningful as it measures the purchasing‬

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‭department’s efficiency given the market conditions that prevailed at that time.‬

‭-‬ ‭It ignores factors which cannot be controlled by the purchasing department.‬
‭Advantages‬ ‭Disadvantages‬

‭1.The analysis highlights variances which‬ ‭1. What should a realistic/achievable‬

‭ re controllable and noncontrollable‬
a ‭ tandard be?‬
s

‭ . Mangers acceptance of the use of‬

2 ‭ . It may become to easy to justify all the‬
2
‭variances for performance measurement‬ ‭variances due to bad planning‬
‭and motivation‬

‭ . The planning and standard setting‬

3 ‭ . Revising and analyzing variances into‬
3
‭processes should improve‬ ‭planning and operational can be costly‬

‭ . Operational variances will provide a‬

4 ‭ . Do managers us correctly this‬
4
‭‘fairer’ reflection of actual performance.‬ ‭meaningful info?‬
‭-‬
‭Variance analysis may not be appropriate in modern manufacturing companies because :‬
‭1.‬ ‭Standard costs apply to manufacturing environments in which quantifies of an identical‬
‭product are output from the production process.‬
‭2.‬ ‭It is doubtful whether standard costing is of much value for performance setting and‬
‭control in automated manufacturing environments.‬
‭3.‬ ‭Variances are the difference between actual performance and standard, measured in‬
‭cost terms‬
‭4.‬ ‭Standard costing and adherence to a preset standard is inconsistent with the concept of‬
‭continuous improvement, which is applied within TQM and JIT environments.‬
‭5.‬ ‭Variance analysis is often carried out on an aggregate bias (total material usage‬
‭variance, total labour efficiency variance and so on) but in complex and constantly‬
‭changing business environments more detailed information is required for effective‬
‭management control.‬
‭6.‬ ‭Shorter product life cycles in the modern business environment mean that standard‬
‭costs will need to be reviewed and updated frequently.‬

‭Key features of operating in a JIT and TQM environment.‬

‭1.‬ ‭High level of automation‬
‭2.‬ ‭High levels of overheads and low levels of direct labour costs‬
‭3.‬ ‭Customized products produced in small batches‬
‭4.‬ ‭Low stock‬
‭5.‬ ‭Emphasis on quality.‬