Management Finance Essay Example | Topics and Well Written Essays - 2500 words

Management Finance - Essay Example Behavioral issues of standard costing include planning and operational variances which further includes materials, sales and labor variances. Planning and operational variances mean when plans or standards of a budget are normally depending on the expected environment where targets are decided. But in reality if the environment is not same as the expected one then the actual performance is compared with the standard performance to measure the changed conditions. In planning variance, we compare the set up standard with the revised standard and in operational variance we compare the actual output with the revised standard. The other important behavioral issues of standard costing involve Variable overhead variance and fixed overhead variance. Variable overhead variance can be defined as the difference between the standard or planned variable overhead cost which is allowed for the actual output and the variable overhead cost that has actually occurred. The variance is also called as ex penditure variance as the variable overhead cost can vary with change in production thus a change in expenses amount can also be the reason of such variance (Drury, 2008, p.432). It can be expressed as follows- Fixed overhead is the portion of total overhead cost variance which can be occurred due to the difference between the standard cost of fixed overhead allowed for the output which is produced in actual. And the actual fixed overhead cost incurred. Fixed overhead variance can be derived as- Fixed overhead further expands itself as a. Budget or Expenditure Variance and b. Volume variance. Budget or expenditure variance is known as that portion of fixed overhead variance which occurs because of difference between actual fixed overheads and planned or budgeted fixed overheads during a particular period of time. It can be derived as follows- Volume Variance is the portion of fixed overhead variance which happens due to the difference between standard costs of fixed overhead which i s allowed for the actual output and the planned fixed overheads for the particular period in which the actual out has been produced (Drury, 2008, p.438). Volume variance can derived as follows- Apart from measuring the variance analysis, we should also focus on the relationship between variance analysis and behavioral issues that occurs in an organization. Variance analysis measures the performance ability of the managers (Izhar, 2001, p.294). Managers know that their performing ability is judged by the variance analysis and their risk and reward depend either on adverse or on favorable result of variance analysis. Thus they have two ways, either they will work hard to achieve the standard amounts or they can manipulate the planned amounts. For this reason the organization should distinguish between controllable cost and uncontrollable cost. Controllable cost can be defined as those cost which can be controlled by the managers if they are efficient enough like cost of labor. It is a controllable cost and if management is efficient then they can reduce the labor cost by reducing number of the inefficient labors. They will hire only those labors that are skilled and efficient in the production line. Uncontrollable costs are those costs which cannot be controlled by management like cost of raw materials. Management cannot influence the cost of raw materials in the market (Bhattacharyya, 2011, pp. 539-540). Thus if the managers are judged by planning variance then they will be discouraged and de-motivated. It