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Variance Analysis
Definition of
Variance Analysis
What is Variance Analysis? Variance analysis is the process of examining the differences (or variances) between planned or budgeted performance and actual performance. In cost accounting, this often involves comparing standard costs (predetermined costs for materials, labor, and overhead) with actual costs incurred. Similarly, it can be applied to revenue, comparing budgeted sales with actual sales. The goal is to identify the causes of these differences, understand their impact, and take corrective actions if necessary.
Activities Related to
Variance Analysis
Here is a list of activities related to Variance Analysis: Establishing standard costs or budgets. Collecting actual cost and revenue data through bookkeeping. Calculating variances for different elements (e.g., direct material price variance, direct labor efficiency variance, sales volume variance, fixed overhead budget variance). Investigating the root causes of significant variances. Determining whether variances are favorable (actual results better than planned) or unfavorable (actual results worse than planned). Preparing variance reports for management. Recommending and implementing corrective actions to address unfavorable variances or to reinforce positive performance. Reviewing and updating standards based on findings.
The Importance of
Variance Analysis
Variance analysis is important because it is a critical tool for cost control, performance evaluation, and informed decision-making. By highlighting deviations from planned results, it enables management to identify areas where operations are not proceeding as expected. This allows for timely investigation and corrective action to improve efficiency, reduce costs, or capitalize on favorable conditions. It helps in holding departments and managers accountable for their performance and provides a basis for revising future budgets and standards. Ultimately, effective variance analysis contributes to achieving financial goals and improving overall profitability. Insights from this analysis are often included in performance reports.
Key Aspects of
Variance Analysis
Comparison Tool
Compares actual results to a predetermined standard, budget, or plan.
Identifies Deviations
Highlights differences (variances) between what was planned and what actually occurred.
Investigative Process
Requires investigation into the causes of significant variances.
Management by Exception
Allows managers to focus their attention on areas where performance significantly deviates from expectations.
Concepts Related to
Variance Analysis
Variance Analysis is a core component of Managerial Accounting and is closely tied to Standard Costing and Budgeting. It involves calculating specific variances such as price variances, quantity/efficiency variances, and volume variances for materials, labor, and overhead. The findings are crucial for effective cost control and performance management.
Variance Analysis
in Action:
The Adventures of Coco and Cami
Coco budgeted to spend $100 on flour for the week (standard cost), but her bookkeeper tells her she actually spent $120. Professor A explains this $20 difference is an unfavorable variance. Variance Analysis helps Coco figure out *why* she spent more – perhaps the price of flour went up, or she used more flour than usual.
Cami uses variance analysis to compare her actual sales revenue to her budgeted sales. If actual sales are higher, it's a favorable variance! Understanding these differences helps them manage their businesses more effectively.