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How does variance analysis help in continuous improvement?

Short Answer

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Variance analysis aids continuous improvement by comparing actual performance against expected performance, identifying areas of improvement, and determining the causes of the variances. Organizations can then implement changes and improvements to address these issues and assess their effectiveness through subsequent variance analyses. Monitoring and assessing the impact of changes through regular variance analysis ensures consistent enhancement of performance and achievement of long-term goals.
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Step 1: Understand the concept of variance analysis

Variance analysis involves comparing actual performance against expected performance or predetermined standards. In financial terms, it can be applied to elements like costs, revenues, and profits. Variances can be favorable (actual performance is better than expected) or unfavorable (actual performance is worse than expected). The purpose of variance analysis is to identify areas where performance deviates from expectations, indicating potential improvement opportunities.

Step 2: Identify areas of improvement

By assessing the variance between actual and expected results, organizations can pinpoint specific areas where improvements can be made. These areas can include processes, systems, or employee performance. Identifying these areas is essential in the continuous improvement process, as it highlights where efforts should be focused to achieve better results.

Step 3: Analyze the cause of the variance

Once the areas of improvement have been identified, it is crucial to analyze the causes of the variances. This can be done through root cause analysis, which aims to determine the underlying reasons for the variance. By understanding the cause, organizations can address the issue and prevent it from occurring in the future.

Step 4: Implement changes and improvements

After identifying the causes of the variances, organizations can implement changes and improvements to address them. These improvements can involve process optimization, resource allocation, employee training, or any other actions that can lead to better performance. The effectiveness of these changes can then be assessed through subsequent variance analyses.

Step 5: Monitor and assess the impact of the changes

Continuous improvement requires ongoing monitoring and assessment to ensure that the implemented changes are having the desired impact. This can be done through regular variance analysis, which can help organizations identify any new variances or areas that need further improvement. Monitoring and assessing the impact of the changes is critical in maintaining momentum and driving long-term growth. In conclusion, variance analysis is an essential tool for continuous improvement as it helps identify areas where performance deviates from expectations, analyze the causes of variances, implement changes, and monitor the impact of these changes. By incorporating variance analysis into the continuous improvement process, organizations can consistently enhance their performance and achieve their long-term goals.

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Most popular questions from this chapter

Chapter 7

List three causes of a favorable direct materials price variance.

Chapter 7

Metal Shelf Company's standard cost for raw materials is \(\$ 4.00\) per pound and it is expected that each metal shelf uses two pounds of material. During 0ctober Year 2,25,000 pounds of materials are purchased from a new supplier for \(\$ 97,000\) and 13,000 shelves are produced using 27,000 pounds of materials. Which statement is a possible explanation concerning the direct materials variances? a. The production department had to use more materials since the quality of the materials was inferior. b. The purchasing manager paid more than expected for materials. c. Production workers were more efficient than anticipated. d. The overall materials variance is positive; no further analysis is necessary.

Chapter 7

Dawson, Inc., is a privately held furniture manufacturer. For August 2017, Dawson had the following standards for one of its products, a wicker chair The following data were compiled regarding actual performance: actual output units (chairs) produced, 2,\(200 ;\) square yards of input purchased and used, 6,\(200 ;\) price per square yard, \(\$ 5.70 ;\) direct manufacturing labor costs, \(\$ 9,844 ;\) actual hours of input, \(920 ;\) labor price per hour, \(\$ 10.70\) 1\. Show computations of price and efficiency variances for direct materials and direct manufacturing labor. Give a plausible explanation of why each variance occurred. 2\. Suppose 8,700 square yards of materials were purchased (at \(\$ 5.70\) per square yard), even though only 6,200 square yards were used. Suppose further that variances are identified at their most timely control point; accordingly, direct materials price variances are isolated and traced at the time of purchase to the purchasing department rather than to the production department. Compute the price and efficiency variances under this approach.

Chapter 7

Sunshine Foods manufactures pumpkin scones. For January 2017 it budgeted to purchase and use 14,750 pounds of pumpkin at \(\$ 0.92\) a pound. Actual purchases and usage for January 2017 were 16,000 pounds at \(\$ 0.85\) a pound. Sunshine budgeted for 59,000 pumpkin scones. Actual output was 59,200 pumpkin scones. 1\. Compute the flexible-budget variance. 2\. Compute the price and efficiency variances. 3\. Comment on the results for requirements 1 and 2 and provide a possible explanation for them.

Chapter 7

When inputs are substitutable, how can the direct materials efficiency variance be decomposed further to obtain useful information?

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