Question

(please type the answers) (accounting 640)

Consider variance analysis in a service industry. Is it a good thing to use or a bad thing to use? Why? What good behaviors could it encourage? What bad behaviors might it encourage? Consider a service industry you are familiar with or something like a call center or tax practice in your discussion

Answer 1

Variance analysis are generally used in production industry. In production industry volume variance is calculated by deducting actual production from budgeted production. Variance analysis can be used in Service industry too, In service industry the variance could be the number of lawsuits filed, tax returns processed or concerts performed.In service industry a variance occurs when revenue or expenditure are either more or less than what the company anticipated and budgeted for. Hence it is good thing to use variance analysis in a service industry. You may take an example of hospitality business in this regard. Hotels and restaurants can experience variances due to occupancy rates, check sizes, supply costs or labor costs being different than expected.Variances are analysed to determine exactly how much these differences have impacted revenue and profits. If your hotel is expected to serve 1000 meals with an average check size of $20 your anticipated revenue would be $20000. If you end up serving only 800 meals but the average check size is $30 your revenue would be $24000.The difference between your expected revenue and your actual revenue is called the variance. In this case there would be a positive revenue variance of $4000. If you end up having lower than anticipated revenues you would have a negative revenue variance.

Use of variance analysis in service industry may encourage good or bad behaviors . It depends on how you implement it in your industry. All variances are not subjected to a variance analysis. whether a variance is analysed depend on how important or unusual it is considered by management. For example if a restaurant budget $100 for miscellaneous expenses around the hotel but the manager actually spends $110 the variance may be considered too small to be important even though the percentage is high . On the other hand , even a small percentage variance in something crucial like the occupancy rate or labor cost may need to be analysed , because the overall effect on profit is much higher.

Variance analysis allows the owner or manager to determine what caused the variance. For example if a Hotel expected labor costs to a total $40000 but ended up paying $45000, a variance analysis would be conducted to determine what happened. If the hotel's estimate was based on renting 10000 rooms and paying the cleaning staff $10 an hour to clean the, with an estimated cleaning time of half an hour , differences in any of these factors could have caused the variance. If the analysis determine that determine that if the hotel rented as many rooms as anticipated and paid the same hourly rate as anticipated , the variance can only have occurred because the rooms took longer than half an hour to clean.

Variance analysis makes it possible for owners and managers in service industry to make the correct strategic decisions needed to overcome problems before they cut into profits too much. If you do not conduct variance analysis when a serious variance occurs, you have nothing other than guess work to guide you. You cannot know whether to address the variance by changing higher rates, finding a more affordable supplier, controlling labor costs or improving occupancy rates unless you d a variance analysis to find out exactly what happened and why it happened.

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