Performance Analysis explains how to use the results of variance analysis to analyse and evaluate past and performance; identifies the factors that influence behavior; discusses the effect variances have on staff motivation; describes the behavior of variances in JIT and TQM environments and discusses the behavioural problems from using standard costs in rapidly changing environments.
a) Analyse and evaluate past performance using the results of variance analysis.
Variance analysis can be used to “analyse and evaluate performance.” It is useful because adverse variances can be signs of an off performance and allows the organization to take steps to improve.
The basic principles of variance analysis are that:
- the money value of the variances can indicate how much profit has been made if the actual performance if different from the budget or standard
- the managers who are responsible for the variances should be identified and should be prepared to explain the variance and explain what measures they are taking to fix them
b) Use variance analysis to assess how future performance of an organisation or business can be improved.
Variance analysis can be used to improve future performance. Based on what occurred in the past, managers can use control measures to improve future performance. One consideration is that control measures should have a long term impact.
c) Identify the factors which influence behaviour.
The factors which influence behavior include:
- Poor attitudes
d) Discuss the effect that variances have on staff motivation and action.
The Theory of Motivation “suggests that having a clearly defined target results in better performance than having no target at all.” Additionally, targets should be accepted by the employees.
When there are adverse significant variances, managers and staff should take steps to improve performance. Variances should be reported to the appropriate manager in a reasonable time so that changes can be made. Managers who are responsible for the variances, should understand that it’s their job to do something to correct the variance.
e) Describe the dysfunctional nature of some variances in the modern environment of JIT and TQM.
It can be difficult to use standard costing and variance analysis in JIT and TQM environments. Variances that indicate adverse performance may not be effective in the JIT and TQM environments because of their nature.
In a JIT environment, the focus is on reducing waste in all areas of the business. For TQM, the focus is on creating zero defects and continuously improving based on customer needs. JIT and TQM require a high level of automation; keep low stocks; produce products in small batches and have high overheads and low direct labour costs.
f) Discuss the behavioural problems resulting from using standard costs in rapidly changing environments.
There is some debate about the role of standards and variances in rapidly changing environments. But, the characteristics of today’s business world should be noted in an effort to understand and deal with any issues that arise:
- Products are customized to customer needs
- Services are not standard
- Variances do not focus on the important cases all the time
- Variances focus on short-term variable costs and not short-term fixed costs
- Short life cycles are better served by life cycle costing and target costing
- Variance reporting is a tedious process and may not be adaptable for “on demand” reporting and monitoring
However, variances may have a role because they can influence:
- Decision making
- Performance measurement
- Product pricing
- Improvement and change
- Accounting valuations
- BPP’s ACCA F5 Performance Management Study Text
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- Preparing for ACCA F5 Performance Management
- A1: Specialist Cost and Management Accounting Techniques | Activity Based Costing (ACCA F5)
- A2: Specialist Cost and Management Accounting Techniques | Target Costing (ACCA F5)
- A3: Specialist Cost and Management Accounting Techniques | Life Cycle Costing (ACCA F5)
- A4: Specialist Cost and Management Accounting Techniques | Throughput Accounting (ACCA F5)
- A5: Specialist Cost and Management Accounting Techniques | Environmental Accounting (ACCA F5)
- B1: Decision Making Techniques | Relevant Cost Analysis (ACCA F5)
- B2: Decision Making Techniques | Cost Volume Profit Analysis (ACCA F5)
- B3: Decision Making Techniques | Limiting Factors (ACCA F5)
- B4: Decision Making Techniques | Pricing Decisions (ACCA F5)
- B5: Make or Buy and Other Short Term Decisions | Pricing Decisions (ACCA F5)
- B6: Dealing With Risk and Uncertainty in Decision Making | Pricing Decisions (ACCA F5)
- C1: Budgeting and Control | Budgetary Systems and Types of Budget (ACCA F5)
- C2: Budgeting and Control | Quantitative Analysis in Budgeting (ACCA F5)
- C3: Budgeting and Control | Standard Costing (ACCA F5)
- C4: Budgeting and Control | Material Mix and Yield Variances (ACCA F5)
- C5: Budgeting and Control | Sales Mix and Quantity Variances (ACCA F5)
- C6: Budgeting and Control | Planning and Operational Variances (ACCA F5)