Why is it important to investigate both price (rate) and volume (efficiency) variances when rewarding employees for satisfactory work when performance evaluations are based on meeting budgets?
The difference or the comparison between the actual and standard performance is called variance. Moreover the variance shows the deviation of actual and standard outcomes. Variance analysis is very helpful for the company to know about their cost structure. Variance analysis helps the management of company in checking the various areas where performance is above and below the company expectations. Price variance is linked to purchase department employees and they have no connection to efficiency variance while efficiency variance is attributable to operations and they have no connection to price variance (Jude Aruomoaghe, Sunny Agbo, 2013). This variance enables the performance assessment against the benchmark standards as adopted by the organization. Favorable variance means employees have performed good while adverse variance means employees has performed below expectations.
The investigation of price and volume is very critical for the company when rewards are giving to employees for their satisfactory work. If the price rate variance is not favorable then the individual who has been given the authority of buying the material can be held responsible and if it is favorable then the reward can be given to that individual (Jude Aruomoaghe, Sunny Agbo, 2013). Moreover, if the volume variance is shows the favorable figure then it shows the efficiency has been achieve due to the good performance of the employee and if the volume variance is not favorable then the individual supervisor should be responsible for the poor performance of the employee.
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Qualitative performance analysis focuses on the quality of job performance of employee that the supervisor able to observe but not measured, like teamwork. The Qualitative performance analysis plays a vital role for making the performance analysis more effective (Milan Fekete, Igor Rozenberg, 2014) The Qualitative performance analysis is more important because that will not impacted the variance but have a bearing on overall profitability of the firm. For the employee’s performance analysis the below mentioned qualitative considerations are important:
1. Customer ratings: Customer rating is one of the most important qualitative considerations which have to be taken into account. If the employee has treated in a well behaved manner then it will give him positive ratings which will help in increasing the number of customers and vice-versa.
2. Skills and competencies: The employee skill and competencies helps in improving the quality of the product and therefore it can also be used as performance evaluation technique. Employees skills also helps in completing the task in skilled way which increase the profitability and productivity of the company as whole (Milan Fekete, Igor Rozenberg, 2014).
3. Risk taking potential: If the employee has the ability to take risk then it will help in increasing the productivity of the employee as well as company and also the goodwill of the firm which will ultimately increase the profits of the firm because there is always a inverse relationship between the risk and return
4. Flexibility: Employee performance can also be measured if he is flexible in taking the decisions by taking the current opportunities which are available to him rather than becoming rigid in taking decisions that will be more beneficial for the organization as well as employees.
Milan Fekete, Igor Rozenberg (2014) The practical model of employee performance evaluation
Jude Aruomoaghe, Sunny Agbo (2013) Application of Variance Analysis for Performance Evaluation: A Cost/Benefit Approach
Pauline Weetman (2006) Management Accounting: Prentice Hall
Anthony A. Atkinson, Robert S. Kaplan, S. Mark Young (2004) Management Accounting: Pearson Prentice Hall