Explain one advantage of variance analysis for ABC.

• A. Variance analysis helps managers identify where actual performance differs from budget and take corrective action
• B. Variance analysis eliminates all variances automatically
• C. Variance analysis guarantees future success
• D. Variance analysis is only relevant for manufacturing

Answer: (A)

The main idea this question tests is that variance analysis in Activity-Based Costing helps managers spot where actual costs or activity levels differ from what was planned and then take corrective action. In ABC, costs are traced to activities and driven by cost drivers, so comparing actual activity costs to the budgeted or standard cost for each activity reveals where resources are being used more or less than expected. This diagnostic insight lets managers investigate the causes—whether it’s inefficiency, volume changes, or driver rate issues—and decide on actions to bring performance back in line, such as process tweaks, resource reallocation, or adjusting standards. For example, if setup activity costs are higher than planned, variance analysis flags that area for investigation and improvement.

The other statements don’t fit as advantages: variances aren’t automatically eliminated by the analysis, it doesn’t guarantee future success, and variance analysis is useful beyond manufacturing, including services and other processes where activities drive costs.