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Business Accounting and Bookkeeping
Financial Statements

Advantages of variance analysis?


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May 04, 2009 10:09PM

As you may know that variance analysis is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company.

This variance analysis can lead to the identification of certain types of task that frequently overrun their budget whilst other tasks may be seen to regularly come in under their budget. Occurrences such as these require further investigation in order to identify potential efficiency gains. The major problem with a variance analysis approach to project monitoring is the amount of time it takes to establish actual costs. On the majority of large projects, supported by a typical accounts department, there will be a time lag of around 6 weeks before spend information can be accurately reported.

The shortcomings and disadvantages of VA can be addressed below:

The monitoring cycle can be so long that it renders the application of control impossible. Typically, by the time a problem has been identified through variance analysis it is too late to take corrective action. This is a major shortcoming of variance analysis and highlights the need for a monitoring system that depicts the current status of the project more effectively.