Variance Analysis

Variance is

“the difference between planned, budgeted, or standard cost and

actual cost; and similarly for revenue”.

Variance analysis involves:

(a) Computation of individual variances, and

(b) Determination of the cause(s) of each variance.

Types of Variances

Unfavorable vs favorable
Actual cost which is higher than the standard costs would be a sign of
inefficiency and the difference would be termed as unfavorable or
adverse variance. (A variance that reduces profit). A variance that
increases profit is favorable.

Controllable and Uncontrollable Variance

Two- way Analysis

Material cost variance - Material price variance

- Material usage variance

Labour cost variance - Labour rate variance

- Labour time variance

As each element of cost is analyzed into two broad groups. It is

known as “Two- way Analysis”.
Classification of material variance
Material Cost Variance

= Standard Cost of Material for Actual Output – Actual Cost of

Materials Used

OR

= (SQ × SP) – (AQ × AP)

Material Price Variance

= Actual Quantity (Standard unit price – Actual unit price)

OR

= AQ (SP – AP)
Material Usage (Quantity) Variance

= Standard Price (Actual Quantity – Standard Quantity)

OR

= SP (AQ – SQ)
Reconciliation

Material Cost Variance =

Material Price Variance

Material Quantity (usage) Variance