Variance (accounting)

For other uses, see Analysis of variance.

Variance analysis, in budgeting (or management accounting in general), is a tool of budgetary control by
evaluation of performance by means of variances beIn budgeting (or management accounting in general), a
variance is the dierence between a budgeted, planned tween budgeted amount, planned amount or standard
amount and the actual amount incurred/sold. Variance
or standard cost and the actual amount incurred/sold.
Variances can be computed for both costs and revenues. analysis can be carried out for both costs and revenues.
The concept of variance is intrinsically connected with Variance analysis is usually associated with explaining
planned and actual results and eects of the dierence the dierence (or variance) between actual costs and the
between those two on the performance of the entity or standard costs allowed for the good output. For example, the dierence in materials costs can be divided into
company.
a materials price variance and a materials usage variance.
The dierence between the actual direct labor costs and
the standard direct labor costs can be divided into a rate
1 Types of variances
variance and an eciency variance. The dierence in
manufacturing overhead can be divided into spending, efVariances can be divided according to their eect or na- ciency, and volume variances. Mix and yield variances
ture of the underlying amounts.
can also be calculated.
When eect of variance is concerned, there are two Variance analysis helps management to understand the
types of variances:
present costs and then to control future costs.
When actual results are better than expected results
given variance is described as favorable variance. In
common use favorable variance is denoted by the
letter F - usually in parentheses (F).

3 See also
Budgeting

When actual results are worse than expected results

given variance is described as adverse variance, or
unfavourable variance. In common use adverse variance is denoted by the letter U or the letter A - usually in parentheses (A).

Non-prot organization
Standard budget
Flexible budget
Rolling budget

The second typology (according to the nature of the underlying amount) is determined by the needs of users of
the variance information and may include e.g.:

Activity-based budgeting (ABB)

Controllable items

Variable cost variances

Non-controllable items

Direct material variances

Standards

Direct labour variances

Motivation

Variable production overhead variances

Performance evaluation

Fixed production overhead variances

direct material total variance

Sales variances

direct material price variance

direct material usage variance

Variance Analysis

Main article: Analysis of variance

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