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Hello Sir
Please kindly explain me the basic principle as explained in the lines below taken from BPP study text
“Planning and operational variances are based on the principle that variances ought to be reported by taking as the main starting point, not the original standard, but a standard which can be seen, in hindsight, to be the optimum that should have been achievable.”
Thanks in advance n may God bless u 🙂Let me explain with a tiny example.
Suppose you budget on paying your workers $10 an hour but you actually pay them $13 per hour. Obviously you have an adverse variance.
However, suppose that throughout the industry we work in there were pay increases of 20% and therefore we were forced to increase the pay of our workers. It would be unfair to ‘blame’ the person in charge of wages for the whole increase from $10 to $13. As it turns out we would expect to have increased our wages by 20% up to $12 (the extra $2 is a planning variance) and we only need an explanation from our manager as to why he ended up paying $13 – an extra $1 – this is the operational variance.
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