Variance Analysis

Once the variances have been calculated they can then be analysed to find what the problems are.

Standard costing and variance analysis allows the management to control the organisation on the principle of 'management by exception'.

The variances highlight problem areas, i.e. those areas where the actual is either better or worse than the standard.

This makes it possible for management to concentrate on the problem areas instead of having to check all areas. In other words the areas where actual and standard are equal or relatively close to equal can be ignored giving management more time to concentrate on the problem areas highlighted by the variances.

The following table shows the possible reasons for both favourable and adverse variances in materials and labour.

Variance Favourable Adverse
Usage Higher Quality Inferior quality
Higher grade workforce Lower grade workforce/trainee
New incentives Machinery problems
New machinery Theft
Price Inferior quality Higher quality
Bulk discounts Loss of discounts
Exchange rate fluctuations Exchange rate fluctuations
  Specification changes
Efficiency Higher grade workforce Lower grade workforce
Higher morale/incentives Lower morale/incentives
Higher quality materials Inferior materials
  Machinery problems
Rate Lower grade workforce Higher grade workforce
Planned overtime not used Shortage of skilled labour
  Unplanned overtime