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Disadvantages of Varience Analysis
Disadvantages of Varience Analysis
Lengthy Process
The process of establishing standard costs can be lengthy in itself. However, companies still need
to perform variance analysis on actual performance. The process can become complicated and
lengthy, which is a limitation of variance analysis. Companies need to consider the time and
effort it requires to perform variance analysis when using the tool.
Costly Process
Subjective Interpretation
Once companies calculate variances, they need to investigate them to reach a conclusion.
However, this process may result in subjective interpretations. Similarly, companies need to
establish thresholds for the variances that they want to investigate. This judgement can also be
subjective and may result in substantial variances to be overlooked or missed.
Reactive Approach
Unlike some other tools in management accounting, variance analysis takes a reactive approach.
Therefore, this tool cannot be useful in preventing any problems. Variance analysis can only
detect deficiencies or problems once they have occurred. While it is still beneficial for
companies to do so, it can also result in significant losses before companies catch the
deficiencies.
Manipulation Of Data
Variance analysis works through establishing standards that departments within a company must
follow. The problem arises when companies enforce variance analysis strictly. It can result in
data manipulation from departmental managers who would want to show a favourable variance.
Service Businesses
Variance analysis works best for production-based companies. For companies in the service
sector, variance analysis provides limited results. While it can still be useful, companies cannot
apply the same variances with services. It is because the structure for service-based businesses
significantly differs from a manufacturing business.
Short-Term Approach
Companies use variance analysis to identify any deficiencies in their processes after every
period. However, this approach may promote a short-term approach towards goals and objectives
rather than a long-term one. While companies want to avoid adverse variances, they are also
necessary for the long-term sometimes. By avoiding these variances, companies can curb their
future growth.
Limited Scope
Variance analysis allows companies to examine specific areas separately. However, some
companies may have complex processes. For example, one product may require input from
various departments. In that case, variance analysis fails to provide meaningful results.
Furthermore, it can also create internal conflicts between managers in case of any adverse
deficiencies.