What Is Operational Variance?
Operational variance is a key metric in the world of management accounting, particularly in the context of standard costing. It measures the difference between current standards—i.e., standards that have been adjusted to reflect present operating conditions—and the actual performance achieved. This form of variance analysis is crucial for businesses to identify discrepancies in their operations, control costs, and make informed strategic decisions.
Key Elements of Operational Variance:
- Standard Costing: A cost-control method where expected costs are determined in advance.
- Current Standards: Adjusted standards that reflect the current conditions and are used as benchmarks.
- Actual Performance: The real-world results achieved by an operation.
Examples of Operational Variance
- Manufacturing Sector: Suppose a machinery manufacturer has set a standard cost of $50 per unit, considering current conditions such as labor rate increases and material costs. If the actual cost incurred is $55 per unit, the operational variance would be $5 per unit.
- Retail Industry: A retail company has a standard labor cost of $20 per hour during peak seasons, based on expected sales volume and staffing levels. In reality, if labor costs rise to $22 per hour due to additional overtimes, the operational variance is $2 per hour.
Frequently Asked Questions (FAQs)
What is the purpose of measuring operational variance?
Operational variance helps in identifying inefficiencies and deviations from expected performance in order to implement corrective actions and improve cost control.
How often should current standards be adjusted?
Current standards should be adjusted periodically, depending on changes in operational conditions such as material costs, labor rates, and productivity levels.
What is the difference between operational variance and revision variance?
Operational variance compares the adjusted current standards with the actual performance achieved, while revision variance compares original standards with revised standards due to changes in operating conditions.
Can operational variance be both positive and negative?
Yes, operational variance can be positive (when actual performance is worse than current standards) or negative (when actual performance is better than current standards).
Are operational variances only applicable in manufacturing?
No, operational variances can be applied across various industries including retail, service sectors, and more, wherever standard costing and performance measurement are utilized.
Related Terms
Standard Costing
A cost accounting method where predetermined costs are established for material, labor, and overheads to serve as benchmarks for performance evaluation.
Variance Analysis
The process of investigating the differences between actual outcomes and the standards or budgets that were set, to understand causes and take corrective actions.
Current Standards
Benchmarks adjusted to reflect current operating conditions, forming the basis for comparing actual performance in variance analysis.
Revision Variance
A difference between original standards and the revised standards, reflecting adjustments due to changes in operating conditions.
Online References
- Investopedia on Standard Costing
- CIMA Global on Variance Analysis
- AccountingTools article on Operational Variance
Suggested Books for Further Studies
- “Managerial Accounting” by Ray H. Garrison, Eric Noreen, Peter Brewer
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
- “Introduction to Management Accounting” by Charles T. Horngren, Gary L. Sundem, Jeff O. Schatzberg, Dave Burgstahler
Accounting Basics: “Operational Variance” Fundamentals Quiz
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