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Variance Analysis

Variance Analysis Assignment / Homework Help
The dictionary meaning of the term 'variance' is 'difference' or 'variation'. The difference or variation is between what is expected and what actually happens. A variance is therefore the difference between the expected result and the actual result. The process of analyzing this difference between the expected and actual result may be defined as the variance analysis. We have a favorable variance (denoted by 'F') when the actual results are better than the expected results. When, however, the actual results are worse than the expected results, we end up with an unfavorable or adverse variance (denoted by 'A').

In Cost Accounting, variance analysis is associated with analyzing the difference between the standard costs and actual costs for a given level of output or activity. The difference is further analyzed to ascertain the specific causes for the variance. For example, in case of variance in the total material costs, it if further analyzed to see if the variance is on account of the price of materials (materials price variance) or its usage (materials usage variance). Similarly, variance in labor costs is analyzed into labor rate variance and labor efficiency variance.

Variance analysis is a very important management tool to understand the cost behavior and take appropriate actions for controls where necessary. The analysis is used to monitor the areas where cost overrun are frequent to assess if the standard costs fixed for the activity or materials is reasonable or the process itself needs to be closely monitored. The analysis also identifies the areas of efficiency within the processes and can be used for rewarding the efficiency, just like it can be used to take corrective actions for areas with adverse variance. It must however be noted that this exercise must be properly carried out and analyzed before arriving at any conclusions.

One of the major disadvantages of variance analysis is that it a post-facto exercise and generally takes a longer time to assess the impact of the variance and consequently results in delayed corrective actions. This drawback can be effectively addressed by maintaining monitoring and data collecting systems that work more on real time basis as opposed to the traditional systems that provide the requisite data after a delayed gap after incurrence. Besides, the positives out of this exercise far out-weigh the dis-advantages associated with this exercise.

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