Variance analysis

Definition

Variance analysis is the process of comparing budgeted financial performance to actual financial performance to identify discrepancies. It helps managers understand why variances occur and how to address them for better future planning.

5 Must Know Facts For Your Next Test

1. Variances can be either favorable or unfavorable, indicating whether actual performance was better or worse than expected.
2. Common types of variances include material, labor, and overhead variances.
3. Variance analysis is crucial for effective budgeting and cost control within an organization.
4. The two main components analyzed are price (rate) variance and quantity (efficiency) variance.
5. Managers use variance analysis to make strategic decisions and improve operational efficiency.

Review Questions

• What are the two main components analyzed in variance analysis?
• Why is variance analysis important for budgeting?
• How do favorable and unfavorable variances impact managerial decisions?

Related terms

Budgeting:

The process of creating a plan to spend an organization's resources.

Standard Costs:

Predetermined costs of manufacturing products, used as benchmarks for measuring performance.

Flexible Budget:

A budget that adjusts expenses based on actual revenue levels.