Explain why managers of small businesses prefer 3-variance analysis over 4-variance analysis.

 Managers of small businesses understand their operations better based on personal observations and nonfinancial measures. They find less value in doing the additional measurements required for 4-variance analyses. For example, to simplify their costing systems, small companies may not distinguish variable overhead incurred from fixed overhead incurred because making this distinction is often not clear-cut. Many costs such as supervision, quality control, and materials handling have both variable- and fixed-cost components that may not be easy to separate. Managers may therefore use a less detailed analysis that combines the variable overhead and fixed overhead into a single total overhead cost.

Correct!