Importance of Variance Analysis in Employee Performance Evaluation

This assignment delves into the critical aspects of employee performance evaluation, focusing on the significance of investigating both price (rate) and volume (efficiency) variances when rewarding employees for satisfactory work, especially when performance evaluations are tied to meeting budgets. The solution explains how variance analysis helps in identifying deviations from standard performance and provides insights into cost structures. It highlights the roles of price variance (linked to purchasing departments) and efficiency variance (linked to operations) in performance assessment. The assignment also discusses the importance of qualitative considerations, such as customer ratings, skills and competencies, risk-taking potential, and flexibility, in making performance evaluations more effective. These qualitative factors, while not directly impacting variances, have a bearing on the overall profitability of the firm. The assignment references key sources to support the analysis.

Question-
Why is it important to investigate both price (rate) and volume (efficiency) variances when rewarding
employees for satisfactory work when performance evaluations are based on meeting budgets?
Solution-
The difference or the comparison between the actual and standard performance is called variance.
Moreover the variance shows the deviation of actual and standard outcomes. Variance analysis is very
helpful for the company to know about their cost structure. Variance analysis helps the management of
company in checking the various areas where performance is above and below the company
expectations. Price variance is linked to purchase department employees and they have no connection
to efficiency variance while efficiency variance is attributable to operations and they have no connection
to price variance (Jude Aruomoaghe, Sunny Agbo, 2013). This variance enables the performance
assessment against the benchmark standards as adopted by the organization. Favorable variance means
employees have performed good while adverse variance means employees has performed below
expectations.
The investigation of price and volume is very critical for the company when rewards are giving to
employees for their satisfactory work. If the price rate variance is not favorable then the individual who
has been given the authority of buying the material can be held responsible and if it is favorable then
the reward can be given to that individual (Jude Aruomoaghe, Sunny Agbo, 2013). Moreover, if the
volume variance is shows the favorable figure then it shows the efficiency has been achieve due to the
good performance of the employee and if the volume variance is not favorable then the individual
supervisor should be responsible for the poor performance of the employee.

What is some qualitative consideration that might be helpful in employee performance evaluations?
Solution-
Qualitative performance analysis focuses on the quality of job performance of employee that the
supervisor able to observe but not measured, like teamwork. The Qualitative performance analysis plays
a vital role for making the performance analysis more effective (Milan Fekete, Igor Rozenberg, 2014)
The Qualitative performance analysis is more important because that will not impacted the variance but
have a bearing on overall profitability of the firm. For the employee’s performance analysis the below
mentioned qualitative considerations are important:
1. Customer ratings: Customer rating is one of the most important qualitative considerations
which have to be taken into account. If the employee has treated in a well behaved manner
then it will give him positive ratings which will help in increasing the number of customers and
vice-versa.
2. Skills and competencies: The employee skill and competencies helps in improving the quality of
the product and therefore it can also be used as performance evaluation technique. Employees
skills also helps in completing the task in skilled way which increase the profitability and
productivity of the company as whole (Milan Fekete, Igor Rozenberg, 2014).
3. Risk taking potential: If the employee has the ability to take risk then it will help in increasing
the productivity of the employee as well as company and also the goodwill of the firm which will
ultimately increase the profits of the firm because there is always a inverse relationship
between the risk and return

4. Flexibility: Employee performance can also be measured if he is flexible in taking the decisions
by taking the current opportunities which are available to him rather than becoming rigid in
taking decisions that will be more beneficial for the organization as well as employees.
References:
Milan Fekete, Igor Rozenberg (2014) The practical model of employee performance evaluation
Retrieved From…..
http://www.toknowpress.net/ISBN/978-961-6914-09-3/papers/ML14-495.pdf
Jude Aruomoaghe, Sunny Agbo (2013) Application of Variance Analysis for Performance Evaluation: A
Cost/Benefit Approach
Retrieved From…..
http://www.iiste.org/Journals/index.php/RJFA/article/viewFile/7790/7935
Pauline Weetman (2006) Management Accounting: Prentice Hall
Anthony A. Atkinson, Robert S. Kaplan, S. Mark Young (2004) Management Accounting: Pearson Prentice
Hall