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, environmenta ...
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 variances
**
Direct labour variances
** Variable production overhead variances
* Fixed production overhead variances
*
Sales variance Sales variance is the difference between actual sales and budgeted sales. It is used to measure the performance of a sales function, and/or analyze business results to better understand market
Market is a term used to describe concepts such as:
*M ...
s
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, environmen ...
*
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
A “standard budget” is a list of goods and services that a family of a specified size and composition would need to live at a designated level of well-being, together with the costs of those goods and services.
Considerable work on standard ...
*
Flexible budget
Flexible may refer to:
Science and technology
* Power cord, a flexible electrical cable.
** Flexible cable, an Electrical cable as used on electrical appliances
* Flexible electronics
* Flexible response
* Flexible-fuel vehicle
* Flexible rake re ...
*
Rolling budget
Rolling is a type of motion that combines rotation (commonly, of an axially symmetric object) and translation of that object with respect to a surface (either one or the other moves), such that, if ideal conditions exist, the two are in contac ...
*
Activity-based budgeting (ABB)
*
Controllable items Controllability is an important property of a control system, and the controllability property plays a crucial role in many control problems, such as stabilization of unstable systems by feedback, or optimal control.
Controllability and observabi ...
*
Non-controllable items
*
Standards Standard may refer to:
Symbols
* Colours, standards and guidons, kinds of military signs
* Standard (emblem), a type of a large symbol or emblem used for identification
Norms, conventions or requirements
* Standard (metrology), an object th ...
*
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
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 com ...
*
Direct material price variance
In variance analysis (accounting) direct material price variance is the difference between the standard cost and the actual cost for the actual quantity of material purchased. It is one of the two components (the other is direct material usage v ...
*
Direct material usage variance
In variance analysis, direct material usage (efficiency, quantity) variance is the difference between the standard quantity of materials that should have been used for the number of units actually produced, and the actual quantity of materials used ...
{{DEFAULTSORT:Variance (Accounting)
Management accounting
Corporate finance