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Variance - What is variance?

Definition: The difference between the standard or budgeted levels of cost or income for an activity and the actual costs incurred or income achieved.

In standard costing and budgetary control, variance is the difference between the expected costs and the actual costs incurred for an activity.

The notion of variance is a comparision of the expected and actual results as well as the effects of the difference between them on the performance of an entity.

When the effect of the variance is concerned, there are two types of results:

  • A favourable variance occurs if the actual performance is better than the standard.
  • An adverse variance occurs if the actual performance is worse than the standard.

Analysis of variance

In standard costing and budgetary control, an analysis of variance takes place when the total profit variance (or the production cost variance) is separated into sub-variances.

This is done in an attempt to indicate why there was a difference between the expected costs and the actual costs.

Sub-variances

Some of the most important sub-variances include:

  • Direct labour total cost variance
  • Direct labour efficiency variance
  • Direct materials total cost variance
  • Direct materials price variance
  • Overhead total variance

  • Overhead efficiency variance

  • Fixed overhead total variance
  • Variable overhead total variance
  • Sales margin price variance
  • Sales margin volume variance