Production variances
Production variances refer to the differences between the actual and budgeted costs and revenues of producing goods or services. They can be positive or negative and are important for evaluating the efficiency of the production process and finding areas for improvement.
They can occur due to several factors, such as changes in input prices, output quantities, quality standards, efficiency levels, or market conditions. Production variances can be positive or negative, depending on whether they increase or decrease the profit margin.
Production variances are important because they show how well the production process is performing and how it can be improved. They also provide feedback on the accuracy and reliability of the budgeting and planning process.
By analysing and reporting production variances, you can find the sources of inefficiency, waste, or error, and take corrective actions to reduce or eliminate them. You can also use production variances to evaluate the effectiveness of your strategies, policies, and goals, and adjust them accordingly.
There are several types of production variances, such as material, labour, overhead, and sales variances, and they can be calculated using the formula: Variance = Actual - Standard. Variance reports summarise and present the variances and help to analyse and interpret the causes and effects of the variances.
To use variance reports for decision making, you need to consider the relevance and reliability of the information, the benefits and costs of the actions to be taken, the trade-offs and constraints, and the priorities and preferences of the stakeholders.