Definition and Significance
A controllable variance gauges the disparity between the actual cost incurred and the budgeted cost designated for a specific expense or revenue item. This variance is directly influenced, managed, or altered by the actions of managers or employees within an organization. Controllable variances arise when actual results deviate from budgeted or planned figures due to decisions, actions, or efficiency levels under the management’s control.
Key Facts
- Definition: The controllable variance consists of a combination of variable and fixed overhead variances that management has influence over. It is a set of overhead variances that management has the power to change or manipulate.
- Types of variances: The controllable variance includes variable spending, variable efficiency, and fixed spending variances. These variances can be influenced by management through negotiating better terms, increasing production efficiencies, or making decisions that affect costs and revenues.
- Examples of controllable variances: Some examples of controllable variances include direct labor variance, direct materials variance, and marketing and advertising variance. These variances arise when actual results differ from the budgeted or planned figures due to decisions, actions, or efficiency levels that are under the control of management.
- Positive and negative variances: Positive controllable variances indicate that actual costs were lower than budgeted costs or actual revenues were higher than budgeted revenues, which is generally a favorable outcome. Negative controllable variances represent the opposite situation, where actual costs were higher than budgeted costs or actual revenues were lower than budgeted revenues, which is typically unfavorable.
Types of Controllable Variances
Controllable variances encompass a range of variances, including variable spending, variable efficiency, and fixed spending variances. These variances are subject to management’s influence through negotiations for better terms, enhancements in production efficiencies, or strategic decisions affecting costs and revenues.
Examples of Controllable Variances
Some common examples of controllable variances include:
- Direct Labor VarianceThis variance arises when the actual wages paid to employees involved in the production process differ from the budgeted amount. Factors such as overtime, productivity, or wage rate changes can contribute to this variance.
- Direct Materials VarianceThe difference between the actual cost of raw materials used in production and the budgeted cost falls under this category. Changes in material prices, efficient purchasing practices, or material usage can lead to this variance.
- Marketing and Advertising VarianceThis variance occurs when actual marketing and advertising expenses deviate from the budgeted amount. Factors like changes in marketing strategies, cost-effective channel selection, or negotiation of advertising rates can influence this variance.
Positive and Negative Variances
Positive controllable variances indicate favorable outcomes, where actual costs are lower than budgeted costs or actual revenues exceed budgeted revenues. Conversely, negative controllable variances represent unfavorable situations, where actual costs surpass budgeted costs or actual revenues fall short of budgeted revenues.
Conclusion
Controllable variances serve as a valuable tool for performance evaluation, cost management, and budgetary control. By analyzing these variances, management can pinpoint areas for improvement, optimize costs, and maximize revenues. Positive controllable variances signify effective cost management and revenue generation, while negative variances indicate opportunities for improvement.
References
- Controllable Variance – Definition & Examples – Study.com
- Controllable Variance Definition | Meaning | Example
- What is a Controllable Variance? – SuperfastCPA CPA Review
FAQs
What is controllable variance?
Controllable variance measures the difference between actual costs or revenues and budgeted costs or revenues that can be directly influenced by management’s decisions and actions.
What types of variances fall under controllable variance?
Controllable variance includes variable spending variance, variable efficiency variance, and fixed spending variance.
How can management influence controllable variances?
Management can influence controllable variances through negotiations for better terms, improvements in production efficiencies, strategic decisions affecting costs and revenues, and optimizing resource allocation.
What are some examples of controllable variances?
Examples of controllable variances include direct labor variance, direct materials variance, marketing and advertising variance, and sales commission variance.
What is the significance of positive and negative controllable variances?
Positive controllable variances indicate favorable outcomes where actual costs are lower than budgeted costs or actual revenues exceed budgeted revenues. Negative controllable variances represent unfavorable situations where actual costs surpass budgeted costs or actual revenues fall short of budgeted revenues.
How can controllable variances aid in performance evaluation?
Controllable variances help management assess the effectiveness of cost control measures, identify areas for improvement, and evaluate the efficiency of operations.
How do controllable variances contribute to cost management?
By analyzing controllable variances, management can pinpoint cost-saving opportunities, optimize resource allocation, and make informed decisions to minimize expenses.
What role do controllable variances play in budgetary control?
Controllable variances assist management in monitoring adherence to budgets, identifying deviations from planned targets, and taking corrective actions to ensure that actual results align with budgetary goals.