ACCA Performance Management (F5) Certification Practice Exam

Why is variance analysis used in business?

1. For market research

2. For employee evaluations

3. For cost control during production

4. For financial forecasting

The correct answer is: For cost control during production

Variance analysis is a crucial tool used in business primarily for cost control during production. This method involves comparing actual performance against budgeted or standard performance to identify differences, known as variances. By analyzing these variances, management can pinpoint specific areas where costs are exceeding expectations or where efficiencies could be improved. For instance, if the actual cost of materials used in production is significantly higher than the budgeted amount, variance analysis allows management to investigate the reasons behind this difference, such as price increases from suppliers or inefficiencies in usage. This insight enables businesses to take corrective actions, adjust budgets, or revise processes to maintain control over costs and improve profitability. While market research, employee evaluations, and financial forecasting are important aspects of business operations, they do not focus directly on the operational efficiency and cost management that variance analysis specifically addresses. Therefore, the application of variance analysis in monitoring production costs makes it an essential tool for effective financial management in manufacturing and service operations.