(b) Controlling variable costsThe first step in the process of controlling costs is to measure actual costs. The second step is to calculate variances that showthe difference between actual costs and budgeted or standard costs. These variances then need to be reported to thosemanagers who have responsibility for them. These managers can then decide whether action needs to be taken to bring actualcosts back into line with budgeted or standard costs. The operating statement therefore has a role to play in reportinginformation to management in a way that assists in the decision-making process.The operating statement quantifies the effect of the volume difference between budgeted and actual sales so that the actualcost of the actual output can be compared with the standard (or budgeted) cost of the actual output. The statement clearlydifferentiates between adverse and favourable variances so that managers can identify areas where there is a significantdifference between actual results and planned performance. This supports management by exception, since managers canfocus their efforts on these significant areas in order to obtain the most impact in terms of getting actual operations back inline with planned activity.In control terms, variable costs can be affected in the short term and so an operating statement for the last month showingvariable cost variances will highlight those areas where management action may be effective. In the short term, for example,managers may be able to improve labour efficiency through training, or through reducing or eliminating staff actions whichdo not assist the production process. In this way the adverse direct labour efficiency variance of ￡252, which is 7·3% of thestandard direct labour cost of the actual output, could be reduced.Controlling fixed production overhead costsIn the short term, it is unlikely that fixed production overhead costs can be controlled. An operating statement from last monthshowing fixed production overhead variances may not therefore assist in controlling fixed costs. Managers will not be able totake any action to correct the adverse fixed production overhead expenditure variance, for example, which may in fact simplyshow the need for improvement in the area of budget planning. Investigation of the component parts of fixed productionoverhead will show, however, whether any of these are controllable. In general, this is not the case2.Absorption costing gives rise to a fixed production overhead volume variance, which shows the effect of actual productionbeing different from planned production. Since fixed production overheads are a sunk cost, the volume variance shows littlemore than that the standard hours for actual production were different from budgeted standard hours3. Similarly, the fixedproduction overhead efficiency variance offers little more in information terms than the direct labour efficiency variance. Whilefixed production overhead variances assist in reconciling budgeted profit with actual profit, therefore, their reporting in anoperating statement is unlikely to assist in controlling fixed costs.