What techniques are used for effective variance analysis?

Effective variance analysis techniques include flexible budgeting, standard costing, trend analysis, and statistical methods such as regression analysis.

Flexible budgeting is a technique that allows for changes in the volume of activity. It provides a more accurate comparison between actual and budgeted performance by adjusting the budget to the actual level of activity before comparing it with the actual results. This way, any variances that are identified are due to factors other than changes in activity levels.

Standard costing is another technique used in variance analysis. It involves comparing actual costs with standard costs for the same level of output. The difference between the two is the variance, which can be further analysed into price and efficiency variances. This technique is particularly useful in identifying areas where costs are not being controlled effectively.

Trend analysis is a technique that involves comparing current performance with past performance to identify trends or patterns. This can help in predicting future performance and identifying areas where action may be needed to improve performance. For example, if the variance for a particular cost is consistently positive, it may indicate that the budget for that cost is consistently being underestimated.

Statistical methods such as regression analysis can also be used in variance analysis. Regression analysis involves identifying the relationship between two or more variables. For example, it could be used to identify the relationship between the level of output and the level of a particular cost. This can help in predicting future costs and identifying areas where costs are not being controlled effectively.

In conclusion, effective variance analysis involves using a combination of techniques to identify and analyse variances. The choice of technique will depend on the nature of the business and the information available.