Variance Analysis
The process of comparing actual financial results to budgeted or standard amounts to identify the size, cause, and responsibility for deviations.
What is Variance Analysis?
Variance analysis is a management accounting technique that compares actual costs, revenues, or quantities to the budgeted or standard figures established in advance. The difference between actual and standard is called a variance — favorable if actual performance is better than expected (e.g., lower costs or higher revenues) and unfavorable if worse. Common variances include the direct materials price variance, direct materials usage variance, direct labor rate variance, and direct labor efficiency variance. Management uses variance analysis to identify where performance deviated from plan, investigate root causes, and take corrective action before small deviations become large problems.
Example
A bakery budgeted $3.00 per pound of flour but paid $3.40 per pound (unfavorable price variance of $0.40/lb). It also used 950 pounds instead of the budgeted 1,000 pounds for the period (favorable usage variance of 50 lbs × standard price). Variance analysis helps the bakery decide whether to renegotiate supplier contracts or review its recipes.