Variance Analysis
Variance analysis compares actual results to standard or budgeted amounts to identify and explain the causes of deviations in cost and revenue performance.
Explanation
Key manufacturing variances include material price variance (actual vs. standard price × actual quantity), material quantity variance (actual vs. standard quantity × standard price), labor rate variance, and labor efficiency variance. Overhead variances can be analyzed using two-way (controllable and volume), three-way, or four-way analysis. Favorable variances improve income; unfavorable variances reduce it. Management investigates significant variances to determine root causes and take corrective action.
Key Points
- •Material: price variance and quantity (usage) variance
- •Labor: rate variance and efficiency variance
- •Favorable variances increase income; unfavorable variances decrease income
Exam Tip
Use the formula: Price variance = (Actual price − Standard price) × Actual quantity. Quantity variance = (Actual quantity − Standard quantity) × Standard price.
Frequently Asked Questions
Related Topics
Cost Accounting
Cost accounting is the process of recording, classifying, analyzing, and allocating costs to products, services, or activities to support management decision-making.
Budgeting and Forecasting
Budgeting is the process of creating a financial plan for a future period, while forecasting uses historical data and assumptions to predict future financial outcomes.
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Practice scenario-based questions on this topic with detailed explanations.