• Variance refers to the deviation of the actual cost or profit or sales from the standard cost or profit or sales.

• When actual cost is less than the standard amount of cost, the deviation is known as favourable variance, and the
opposite is termed as an adverse variance.

• Variance analysis refers to analysis of performance in terms of variances in a standard costing system.

• Analysis of variances is done for each element of cost, and sales and profit. These are as follows
• Material variances

• Labour Variances

• Overhead variances

• Sales Variances and

• Profit variances.

In terms of sales and profit variances, if actual sale or profit is more than the standard or budgeted sale of profit, it is
favourable variance.
• Material variances are the difference between the total standard cost of material and the total actual cost of materials; it may be caused by many
reasons such as improper handling of materials, changes in price, changes in freight, changes in quality etc.

MCV = (SQ  SP) –(AQ  AP)

MPV= AQ (SP- AP) MUV = SP (SQ-AQ)

MMV = SP (RSQ – AQ) MYV= SCO (AY –SY)

• Where MCV = Material Cost Variance, MPV = Material Price Variance, MUV = Material Usage Variance, MMV= Material Mix Variance, MYV = Material Yield Variance

• SQ = Standard Quantity, AQ= Actual Quantity, SP= Standard Price, AP= Actual Price, RSQ =Revised Standard Quantity, SCO= Standard Cost of output per unit, SY= Standard
Yield, AY= Actual Yield.

• RSQ = Standard Proportion  Total Actual Quantity, Standard Proportion =

• Labour variance is also called the wages variance is the difference between the total standard cost of labour for actual output and the actual cost of labour

employed. It may be caused by employing different grades of labour, changes in wage rate, working conditions, use of non-standard materials etc.

LCV = (SH  SR) –(AH  AR) (standard hour for actual output is calculated)

LRV= AH (SR- AR) LEV = SR (SH-AH)

LMV = SR (RSH – AH) ITV= SR  IH LYV= SCO (AY –SY)

• Where LCV = Labour Cost Variance, LRV = Labour Rate Variance, LEV = Labour Efficiency Variance, LMV= Labour Mix Variance, ITV = Idle Time Variance and LYV = Labour
Yield Variance

• SH = Standard Hour, AH= Actual Hour, SR= Standard Rate, AR= Actual Rate, RSH =Revised Standard Hour, SCO= Standard Cost of output per unit, IH= Idle Hour, SY= Standard
Yield, AY= Actual Yield.

• RSH = Standard Proportion  Total Actual Hour, Standard Proportion =