Variance Analysis

In managerial accounting or budgeting, the variance is the difference between the budget standard or planned amount and the amount sold or amount incurred. Variance analysis could be used to calculate both revenues and costs.  The model of variance is basically connected with standard or planned actual effects and results of the difference between those two on the performance of the company or entity.

Different types of variances  

Variances could be categorized according to their nature or effect of the underlying amounts.  When the nature of the variance is related or concerned, there are two kinds of variances and they are as follows:  

When the actual outcomes are better than the expected outcomes the given variance is called as favorable variance.  In general use of favorable variance is expressed by the letter “F” generally in the parentheses (F).

When the actual outcomes are bad or worse than the expected outcomes the given variance is called as unfavorable variance or adverse variance. In general use of unfavorable variance is expressed by the letter “U” or “A”, generally in the parentheses (A).

Another type of variance is determined by the requirements of the users of the variance data or according to the effect of the underlying amount and might include:

• Variable cost variances

  • Direct labor variances
  • Variable manufacturing overhead variances
  • Direct material variances

• Fixed production overhead variances

• Sales variance

Variance Analysis

 The Variance analysis, in managerial accounting or budgeting, is a tool of the budgetary control by assessment of the performance with the help of the variances between planned amount, standard amount or budgeted amount and actual amount sold or incurred. Variance analysis could be carried out for both revenues and costs.

Questionnaire:

• What is variance and variance analysis?
• What are the types of variances and explain?