Performance Management That Primarily Involves Investigating Variances.

¶ … performance management that primarily involves investigating variances. Variances may take place because of several reasons such as climate changes that contribute to increase in electrical bills or slower of faster work by some employees. Nonetheless, only some of these factors or reasons are significant and may require management attention. Due to these unpredictable random factors or reasons, it's expected that nearly every category of cost will result in a variance of some kind. The investigation and calculation of variances is carried out to enable managers in the control of a business. However, managers need to make effective decisions on whether to conduct variance analysis for successful control.

Investigating Variances:

As previously mentioned, variances are brought by several reasons that may require the attention of management. Therefore, the decision on when to investigate variances is based on consideration of several factors. These factors include the accuracy and reliability of the figures, materiality, probable interdependencies of variances, and intrinsic variation of cost or revenue (Jay, 2006). Under reliability and accuracy of figures, variances should be investigated when there are mistakes in calculating budget figures or during recording of actual revenues and costs. Materiality may lead to investigation of variances when the variance size may demonstrate the problem's extent and probable benefits from its correction. Variances should also be investigated when one variance is a particular area may lead to another in a related area. Costs and variability are not only volatile but may indicate a problem that requires investigation of variances to contribute to stability. The other reasons for investigating a variance are past pattern and whether the budget is realistic or unrealistic.

The major factors associated with the occurrence of a variance include inaccurate budgeting, changes in economic realities, and employee theft. Inaccurate budgeting leads to the occurrence of a variance when there is bad guess or estimation of income or expenses. On the other hand, changes in economic realities contribute to variances if the firm experiences an increase or decrease in costs or revenues because of market changes on the overall economy. When employees are involved in theft or fraud that is difficult to detect, a variance may occur in the company's budgeting process (Mohr, n.d.).

Variances should be corrected by the company financial management team and the firm's executives. In most cases, organizations use a series of rules to decide on the variances to investigate such as percentage of standard cost approach, control charts, and probability-based models. This process of correcting them should be based on the factors that contribute to their occurrence in the company. The first way for correcting them is to update the budget in order to reflect the actual income or expenses of a company's financial transactions. Secondly, if the variance occurred because of changes in economic realities, it can be corrected by reviewing the entire budget and projecting new expenses and revenues in light of the existing market realities. The third process involves conducting a variance analysis to determine the probability of any employee practices that could have contributed to the variance.

Using Purchase Price Variance as a Performance Measuring Tool:

In the past few years, purchase price variance has emerged as the only effective and trusted measure of measuring purchasing performance. In the past, procurement and supply professionals used two approaches to create purchase price variance reports. However, these approaches were largely ignored or challenged because neither of them works. The use of purchase price variance as a performance measuring tool has been fueled by the expected changes in the role of purchasing in the future. Nonetheless, the use of this process to measure performance has benefits and drawbacks. One of the major benefits of using this tool is because it's the only measure of purchasing performance that is usually stated in the annual report (Barry, 2010). Its inclusion in the annual report is based on the fact that purchasing has been distinctively effective in negotiating deductions for a long period of time. Secondly, the use of this tool enables the company to identify the overall impact of competitive pricing. This is usually accomplished through the development of a market-basket concept that shows the highest purchase commodities.

Despite of these benefits, the use of this tool to measure performance is also characterized with some drawbacks including the fact that the report is prepared by junior accountants with no actual knowledge of procurement and market functions. Secondly, the use of this tool for performance measurement is characterized with time delay and the need to examine huge accounting information.

Companies would want to use purchase price variance as a tool to measure performance because it helps to determine the firm's current purchasing conditions. Generally, this process is mainly based on standard price collected from opinions of various workers and based on certain assumptions. It analyzes performance by evaluating the difference between the actual price of a commodity or item and its standard price. The company may need to review all variances because it enables them to understand the reasons for fluctuations in the business and how to change the conditions.