Variance Analysis
The process of investigating differences between planned and actual results, identifying the causes of deviations to improve future performance and budgeting accuracy.
Variance Analysis
The process of investigating differences between planned and actual results, identifying causes of deviations to improve future performance, operational control, and budgeting accuracy.
For example, a manufacturing company’s variance analysis might reveal that production costs exceeded budget by $120,000, with further investigation showing this resulted from $50,000 in unfavorable material price variances (higher input costs), $30,000 in unfavorable labor efficiency variances (more hours than standard), and $40,000 in unfavorable overhead variances (underutilized capacity).
Variance analysis compares actual performance to standards, budgets, or forecasts, distinguishing between favorable variances (better than expected) and unfavorable variances (worse than expected). Common applications include analyzing sales (volume and price variances), costs (price and efficiency variances), and profits. Effective variance analysis goes beyond identifying deviations to determine root causes, assign responsibility, and implement corrective actions. While providing valuable management insights, the process should focus on material variances and consider interdependencies between different variance categories to avoid suboptimization.