Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.4, No.13, 2013 111 Application of Variance Analysis for Performance Evaluation: A Cost/Benefit Approach. Jude Aruomoaghe Sunny Agbo Department of Accounting, Igbinedion University, Okada, Edo State. *E-mail of Corresponding Author: jaruos@yahoo.com. Abstract Every organization seeks to maximize its benefits and achieve its goals and objectives. In a bid to ensure this, they employ different measures in their performance evaluation. The purpose of this performance evaluation is to ensure that every person in the organization is working towards achieving a common organizational goal. In the process of carrying out their performance evaluation, they employ several performance measures. Some of the measures may be financial or non-financial. This study examined the cost and benefits associated with the use of variance analysis as a performance evaluation tool. Extensive literature review was made and it was recommended that managers should employ the balance scorecard performance measure because it strikes a balance between the financial and non-financial measure. Keywords: Performance Evaluation, Variance Analysis, Cost/Benefit 1. Introduction Every organization seeks to maximize benefits from its operations. This they can achieve through adequate planning and monitoring of such plans to ensure they don’t deviate adversely from the plans. Planned operations are usually achieved with the use of budgeted standards. These Budgeted standards can be seen as a future plan of action designed by management to help achieve organizational objectives. It provides a benchmark for monitoring the operations and performance of organizations. Moreover, as organizations grow in size, there is the need for such organizations to decentralize its activities and assign managers or departmental heads to oversee these various units and departments created. There is the need to ensure that these departmental managers don’t deviate from the budgeted standards put in place in the organization as a whole to ensure that their objectives are achieved. In order to achieve this, the departmental managers are evaluated from time to time to ascertain whether their activities and mode of operations are in consonance with the organizational objectives of such organizations. In evaluating these managers, different performance evaluation tools and measures are available at the disposal of the top management to utilize. Some of these measures may be financial or non-financial depending on the various organizational policies. This study therefore examines the application of variance analysis as a tool for performance evaluation with a particular focus on the cost and benefit associated with its utilization as a performance evaluation tool. 2. Literature Review According to Okoye (2011:457), “the process of decentralization implies that autonomous units are created and reliable managers are deployed to control the operations of the autonomous units”. One of the ways of assessing the reliability and efficiency of these divisional managers is through performance evaluation. Several authors have defined performance evaluation in different ways. Henderson (2012:1) defines performance evaluation as a situation “when the performance of the employee is assessed and discussed in thorough detail, with the manager communicating the weaknesses and strengths observed in the employee and also identifying opportunities for the employee to develop professionally”. Dakota (2010:1) in his view states that “Performance Evaluation is a tool you can use to help enhance the efficiency of the work unit. This tool is a means to help ensure that employees are being utilized effectively”. This simply implies that employees can use it as a clear indication of what is expected of them before you tell them how well they are doing, and then as feedback of how well they did. Muchinsky (2012) is of the view that performance evaluation is a systematic and periodic process that assesses an individual’s performance and productivity in relation to certain pre-established criteria and organizational objectives. Organizations employ different performance measures in evaluating performances. According to Horngren, Sundem and Stratton (2007:387), “An organizations performance measure depends on its goals and objectives”. Performance measures can be divided into financial performance measures and non-financial performance measures. Okafor (2006) is of the view that financial performance measures can be subdivided into accounting measures and market based measures. The accounting measures include Return on Investment (ROI), Return on Total Asset (ROTA) and Return on Sale (ROS). The market based performance measures are stock Returns and Price volatility. The non-financial performance measures complement the financial performance