Cost Accounting

As already noted above, not all variances are investigated, it is only the material and meaningful (for cost control purposes) variances that are investigated for further management action. But even as we go into investigating what caused a variance to occur, we need to consider the following factors:

1. Materiality Management should define the materiality level which when reached needs to be investigated. All variances below the materiality level are not investigated.

2. Sensitivity to Cash Flow We need to consider which variances translate into cash flow implications e.g. price variances. If a variance is very highly sensitive to cash flows, then we need to set a low materiality level while if a variance has very low sensitivity to cash flow, then we need to set a high materiality level.

3. Frequency of Occurrence A variance that occurs frequently or consistently needs to be investigated as early as possible.

4. Control We only need to hold managers accountable for the variances which they could control. Variances caused by factors beyond the managers control cannot be blamed on the manager, e.g. external factors such as the government actions, inflation and unfavourable exchange rates could cause adverse variances which the managers cannot be held responsible for.

5. Cost-Benefit Analysis If the cost of investigating a variance exceeds the benefits of such organization, then there is no need of investigating the variance as it is a waste of resources. The reverse is correct.
6. The management Style In an autocratically managed organization all variances are investigated as actions are not expected to deviate from the stipulated. In a democratically managed organization, only the material variances would be investigated.

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