Professional Documents
Culture Documents
Variance Analysis
Analysis of the difference between planned and actual numbers
For example, if the actual cost is lower than the standard cost for raw
materials, assuming the same volume of materials, it would lead to a
favorable price variance (i.e., cost savings). However, if the standard quantity
was 10,000 pieces of material and 15,000 pieces were required in production,
this would be an unfavorable quantity variance because more materials were
used than anticipated.
Types of Variances
When calculating for variances, the simplest way is to follow the column
method and input all the relevant information. This method is best shown
through the example below:
Direct materials: 25,000 pieces purchased at the cost of $0.48 per piece
Materials Variance
Labor Variance
The same column method can also be applied to variable overhead costs. It
is similar to the labor format because the variable overhead is applied based
on labor hours in this example.
Adding the budget variance and volume variance, we get a total unfavorable
variance of $1,600. Once again, this is something that management may
want to look at.
Enter your name and email in the form below and download the free
template (from the top of the article) now!
First Name *
Email *
* By submitting your email address, you consent to receive email messages (including discounts and newsletters) regarding
Corporate Finance Institute and its products and services and other matters (including the products and services of
Corporate Finance Institute's affiliates and other organizations). You may withdraw your consent at any time.
This request for consent is made by Corporate Finance Institute, 801-750 W Pender Street, Vancouver, British Columbia,
Canada V6C 2T8. www.corporatefinanceinstitute.com. learning@corporatefinanceinstitute.com. Please click here to view
CFI`s privacy policy.
Quantity standards indicate how much labor (i.e., in hours) or materials (i.e.,
in kilograms) should be used in manufacturing a unit of a product. In
contrast, cost standards indicate what the actual cost of the labor hour or
material should be. Standards, in essence, are estimated prices or quantities
that a company will incur.
Related Reading
This has been CFI’s guide to Variance Analysis. To help you advance your
career, check out the additional CFI resources below:
Learn More
We're hiring!
Company
Certifications
Courses
Support
Resources