Variance Analysis in Accounting

MANAGEMENT ACCOUNTING ACCOUNTING 8 8 Management Accounting Student Name University Name Answer to 1b 3 Answer to 4B: Purpose and usefulness of Variance Analysis 4 Introduction 4 Discussion on Purpose and usefulness of Variance Analysis 4 Conclusion 5 Question 5 A 6 Calculation of budget 6 Question 5B 6 References 8 Answer to 1b Relationship between Management Accounting and history Roman Coliseum can be considered as one of the ancient Amphitheatre build in Rome in 70–80 AD. The elements of activity based costing are as follows

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Management Accounting
Student Name
University Name

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Table of Contents
Answer to 1b....................................................................................................................................3
Answer to 4B: Purpose and usefulness of Variance Analysis.........................................................4
Introduction......................................................................................................................................4
Discussion on Purpose and usefulness of Variance Analysis..........................................................4
Conclusion.......................................................................................................................................5
Question 5 A....................................................................................................................................6
Calculation of budget.......................................................................................................................6
Question 5B.....................................................................................................................................6
References........................................................................................................................................8

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Answer to 1b
Relationship between Management Accounting and history
Roman Coliseum can be considered as one of the ancient Amphitheatre build in Rome in
70–80 AD. Modern Management Accounting theory may be useful if this Amphitheatre is rebuilt
again.
Activity based costing may be used to re-built the structure of Roman Coliseum. This is
mainly because it will be a new production process and it will be done in batches. It will also
help to assign manufacturing overhead costs in a proper manner. Activity based costing will also
help to prioritize inventories based on their value and importance (Quinn 2014). Therefore, if
Roman Coliseum is rebuilt, then the inventories needs to be prioritize effectively.
The elements of activity based costing are as follows:-
 Identification of the activities
 Classification of each activity
 Identification of total costs for each given activity
 Cost driver for each given activity
 Analysis of total units of each cost driver
 Identifying the activity rate
 Implementation of usage of each activity
In case of recreating the Roman structure, it is important to manage the costs in an effective
manner. ABC costing will also help to identify activities of costs objects as well as overhead
costs. In addition to this, it will also help in effective decision making process (Scott 2015).

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Answer to 4B: Purpose and usefulness of Variance Analysis
Introduction
Collier (2015) opines that variance analysis can be defined as the difference between planned
action and actual action. In case of management accounting, variance analysis is generally used
to evaluate the differences between budgeted expenses and actual expenses. The given report
will highlight the purpose and usefulness of variance analysis.
Discussion on Purpose and usefulness of Variance Analysis
The importance of concept of variance analysis in management accounting is inevitable. It is
generally used by management accounts to evaluate the degree of differences between budgeted
costs and actual costs. It can be inferred that the actual expenses are lower in number in
comparison to budgeted costs, then, the particular variance can be termed as favorable variance.
On the other hand, if actual costs are more than budgeted costs, then that particular variance can
be termed as unfavorable. This can be further explained with the help of the following table:-
Particulars Budgeted Actual Variance
Sales 100000 180000 80000
Cost of Goods sold 40000 90000 -50000
Gross Profit 50000 90000 40000
Table 1: Example of Variance Analysis
From the above table, it can be inferred that the actual revenue is more than expected revenue.
Therefore, the variance is positive. On the contrary, actual cost of goods sold is more than
budgeted which can be considered as unfavorable.

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The purpose and usefulness of variance analysis is as follows:-
1. Cost control- With effective usage of variance analysis, business organizations can
control their direct and indirect costs. Not only this, the management of the respective
organizations will get to know which costs need to be controlled and by what amount.
The organization can also implement separate cost cutting methods based on the results
of the variance analysis (Williams 2014).
2. Effective preparation of future budget- With the help of past variance analysis, the
organizations can prepare their future budgets in an effective manner. In addition to this,
it can be inferred that the management of the firm can take effective measures in order to
control the variances in costs as well as in revenue or receipts.
3. Realistic picture- It can be inferred that variance analysis provides a realistic picture to
the management of the organizations. With the help of variance analysis, the
organizations can get to know where we went wrong. If the variance is on the higher side,
then they can take positive measures accordingly.
4. Other aspects- With the help of variance analysis, the organizations can also measure
their respective variances with respect to labor and material. In addition to this, it can be
inferred that the organizations can also take effective steps to improve the efficiency of
their labors. This can be done with the help of overhead variance analysis (Collier 2015).
Conclusion
From the above analysis, it can be inferred that variance analysis is very useful for the
management of the firms in case of decision making purpose. The organization can forecast their
costs and profits effectively with the help of past variances. Therefore, it can be said that
variance analysis plays a pivotal role in organizations.

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Question 5 A
Calculation of budget
Question 5B
Process of Budget
The budgetary process is extremely useful for organizations. It helps the organization to
efficiently manage their respective costs (Otley 2016). Every organizations have their respective
missions and goals. Based on this mission, goals and objectives, the respective budget is
prepared.

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Figure 1: Cartoon Image of Budgetary process
The above cartoon image shows that the board of directors of an organization is having a
meeting regarding their budget for that particular year. The discussion is taking place in a
humorous manner. However, many of the board of directors seems worried about the budgetary
figures.

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References
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014.
Management accounting research, 31, pp.45-62.
Quinn, M., 2014. Stability and change in management accounting over time—A century or so of
evidence from Guinness. Management Accounting Research, 25(1), pp.76-92.
Scott, W.R., 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.
Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.