What Do We Mean By Variance Analysis

Variance analysis is to analyse variance.

• Variance is basically the difference between actual cost of manufacturing and the standard cost at the actual level of production. Variance analysis assists operating managers to analyse and determine the corrective actions needed for improvement.
• Note that in variance analysis, we say that the variance can be favourable (F) if actual cost is less than standard costs and variance are adverse/unfavourable(A or U) if actual cost is more than standard cost.
• When analysing variances in a manufacturing company, we mainly look at three areas namely direct material variance, direct labor variance and factory overhead variance.
  

What Are The Purposes Of A Standard Cost System

As earlier describe of the standard cost system, the purposes or uses of a standard cost system comprises the following:

• setting realistic target
• cost management
• planning and control
• decision making and product costing
• inventory valuation and
• prediction of future costs

With a proper standard cost system, hopefully all the above mentioned benefits/purposes can be achieved.

What Do We Mean By Standards, Standard Cost And Standard Cost System

This article seeks to differentiate the three terms:-standards,standard cost and standar cost system.

Standards:

• performance goals that are used to control and evaluate managerial performance
• two types of standards namely IDEAL standard re: most perfect and can be achieved if no wastage/spoilage, machine breakdown and others and ATTAINABLE OR NORMAL standard which are realistic levels of efforts. Allowances are made for interruptions, normal defectives, spoilage, waste and non productive time.
  

Standard cost:

• a target cost that should be achieved
• predetermined from historical experience, engineering studies and from operating personnel
• used to compare with actual cost to get the performance of a given costing department or operation

Standard Cost System:

• for determing accurate costing products and to control cost in managing production, marketing and administrative function within the business
• an accounting system designed to allocate costs of direct labor, indirect labor, materials, overheads and selling/general/administrative accounts on a unit basis
  

What Are The Advantages Of Special Or Subsidiary Ledgers

The advantages of special or subsidiary ledgers are similar to the special journals.

Before we move to the advantages of special or subsidiary ledgers lets look at what are subsidiary ledgers.

Special or Subsidiary ledgers are ledgers used to simplify the General ledger , for example a business that sells goods on credit find it necessary to maintain a separate account for each customer and each creditor hence the use of a special Accounts Receivable Ledger and An Accounts Payable Ledger. Having such special ledgers, it eliminates multiple entries in the General ledger.

Some of the advantages of having special or subsidiary ledgers are:

• Reduces ledger detail. It simplifies the general ledger by having most of the information recorded in the subsidiary ledger hence facilitating the easier preparation of the financial statement.
• Permits better division of labor. Like the special journal, it enable individual special or subsidiary ledger to be maintained by a different person. With this division, we see one person can now work on the general ledger accounts while another person on the subsidiary ledger
• Permit better internal control. With different persons handling the general ledger and the subsidiary ledger, it allows better internal control. Don't forget that the individual subsidiary ledger must tally with the general ledger hence the general ledger acts as a controlling account. No unauthorized entry could be made in the subsidiary ledger as it would immediately put that record out of balance with the control(general ledger) account
• Lastly, it permits a different sequence of accounts wherein in the general ledger the sequence should facilities the preparation of the financial statement while the subsidiary ledger like accounts receivable/payable should preferably be in alphabetically sequence