Variance Analysis
Variance analysis is usually associated with explaining the difference (or variance) between actual costs and the standard costs allowed for the goods output. For example, the difference in materials costs can be divided into a materials price variance and a material usage variance. The difference between the actual direct labor costs and the standard direct labor costs can be divided into a rate variance and an efficiency variance. Variance analysis helps management to understand the present costs and then to control future costs.
Variance analysis is also used to explain the difference between the actual sales and budgeted sales.
Variances may be divided into:-
- Material Variance
- Labor Variance
- Overhead Variance
- Sales Variance
- Material Variance: The variance in the cost of materials i.e. the difference between the standard cost of materials for actual output and the actual cost of materials would give the variance on account of materials. We call this the “Material Cost Variance”.
- Labor Variance: A labor variance arises when the actual expense associated with a labor activity varies (either better or worse) from the expected amount. The labor variance concept is most commonly used in the production area, where it is called a direct labor variance.
- Overhead Variance: The difference between the absorbed overhead and incurred overhead is what we call the under/over absorbed overhead. Overhead variance is nothing but this. We call this the Total Overhead Cost Variance.
- Sales Variance: It is the variance between actual sales and budgeted sales. It is used to measure the performance of a sales function, and/or analyze business results to better understand market conditions
