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What is Variance?

Definition: Variance can be defined as the difference between the budgeted or expected cost or income for an activity and the actual costs or income for the activity.

In standard costing and budget control, variance constitutes the difference between the budgeted costs and the actual costs for an activity.

Variance encompasses both a comparision of the budgeted and the actual income or costs as well as the effects of the differences on the performance of an entity.

Two types of variance results exist in terms of the variance effect:

  • A favourable variance is achieved when the actual performance is better than the expected results.
  • An adverse variance is achieved when the actual performance is worse than the expected results.

Variance analysis

In standard costing and budget control, variance analyses are performed when the income or cost variance is divided into sub-variances in order to establish the reason for the difference between the expected income or costs and the actual results.

There are many different types of sub-variances. The most important include:

  • Overhead efficiency variance
  • Overhead total variance
  • Fixed overhead total variance
  • Direct materials price variance
  • Direct materials total cost variance
  • Direct labour efficiency variance
  • Direct labour total cost variance
  • Sales margin volume variance
  • Sales margin price variance
  • Variable overhead total variance

 

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