In
budget
A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environme ...
ing (or
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
in general), a variance is the difference between a budgeted, planned, or standard cost and the actual amount incurred/sold. Variances can be computed for both costs and revenues.
The concept of variance is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company.
Types of variances
Variances can be divided according to their effect or nature of the underlying amounts.
When effect of variance is concerned, there are two types of variances:
* When actual results are better than expected results given variance is described as favorable variance. In common use favorable variance is denoted by the letter F - usually in parentheses (F).
* When actual results are worse than expected results given variance is described as adverse variance, or unfavourable variance. In common use adverse variance is denoted by the letter U or the letter A - usually in parentheses (A).
The second typology (according to the nature of the underlying amount) is determined by the needs of users of the variance information and may include e.g.:
* Variable cost variances
**
Direct material variance
In variance analysis (accounting) direct material total variance is the difference between the actual cost of actual number of units produced and its budgeted cost in terms of material. Direct material total variance can be divided into two co ...
s
**
Direct labour variance Direct labour cost variance is the difference between the standard cost for actual production and the actual cost in production.
There are two kinds of labour variances. ''Labour Rate Variance'' is the difference between the standard cost and the ...
s
** Variable production overhead variances
* Fixed production overhead variances
*
Sales variances
Variance analysis
{{also, Budget analyst
Variance analysis, first used in ancient Egypt, in budgeting or
management accounting
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Definition
One simple definition of management accounting is th ...
in general, is a tool of budgetary control by evaluation of performance by means of variances between budgeted amount, planned amount or standard amount and the actual amount incurred/sold. Variance analysis can be carried out for both costs and revenues.
Variance analysis is usually associated with explaining the difference (or variance) between actual costs and the standard costs allowed for the good output. For example, the difference in materials costs can be divided into a materials price variance and a materials usage variance. The difference between the actual direct labor costs and the standard direct labor costs can be divided into a rate variance and an efficiency variance. The difference in manufacturing overhead can be divided into spending, efficiency, and volume variances. Mix and yield variances can also be calculated.
Variance analysis helps management to understand the present costs and then to control future costs.
Variance calculation should always be calculated by taking the planned or budgeted amount and subtracting the actual/forecasted value. Thus a positive number is favorable and a negative number is unfavorable.
See also
*
Budgeting
A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environme ...
*
Non-profit organization
A nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...
*
Standard budget
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Flexible budget
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Rolling budget
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Activity-based budgeting (ABB)
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Controllable items
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Non-controllable items
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Standards
*
Motivation
Motivation is the reason for which humans and other animals initiate, continue, or terminate a behavior at a given time. Motivational states are commonly understood as forces acting within the agent that create a disposition to engage in goal-dire ...
*
Performance evaluation
A performance appraisal, also referred to as a performance review, performance evaluation,Muchinsky, P. M. (2012). ''Psychology Applied to Work'' (10th ed.). Summerfield, NC: Hypergraphic Press. (career) development discussion, or employee appr ...
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Direct material total variance
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Direct material price variance
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Direct material usage variance
{{DEFAULTSORT:Variance (Accounting)
Management accounting
Corporate finance