Business, Legal & Accounting Glossary
In standard costing and budgetary control this refers to the analysis of variances in order to determine their causes. The total profit variance or production cost variance is analysed into sub-variances to indicate the major reasons for differences between budgeted figures and actual outcomes.
ANOVA – Acronym for analysis of variance.
In standard costing and budgetary control this refers to the analysis of variances in order to determine their causes.
The total profit variance or production cost variance is analysed into sub-variances to indicate the major reasons for differences between budgeted figures and actual outcomes.
Here are the most commonly-derived variances used in variance analysis (they are linked to more complete descriptions, as well as examples):
It is not necessary to track all of the preceding variances. In many organizations, it may be sufficient to review just one or two variances. For example, a services organization (such as a consulting business) might be solely concerned with the labor efficiency variance, while a manufacturing business in a highly competitive market might be mostly concerned with the purchase price variance. In other words, put most of the variance analysis effort into those variances that make the most difference to the company if the underlying issues can be rectified.
There are several problems with variance analysis that keep many companies from using it. They are as follows:
Many companies prefer to use horizontal analysis, rather than variance analysis, to investigate and interpret their financial results. Under this approach, the results of multiple periods are listed side-by-side, so that trends can be easily discerned.
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direct labour efficiency variance
direct labour rate of pay variance
direct labour total cost variance
direct materials price variance
direct materials total cost variance
direct materials usage variance
fixed overhead total variance
overhead efficiency variance
overhead expediture variance
overhead total variance
sales margin price variance
sales margin volume variance
variable overhead total variance
The quantitative investigation of the difference between actual and planned behaviour is known as variance analysis. This analysis is used to keep control of a business by investigating areas where performance was unexpectedly poor. For example, if your sales budget is $10,000 and your actual sales are $8,000, variance analysis reveals a $2,000 difference. Variance analysis is especially useful when reviewing the amount of a variance on a trend line, as this makes sudden changes in the variance level from month to month more visible. Variance analysis also entails investigating these differences, with the end result being a statement of the difference from expectations, as well as an interpretation of why the variance occurred. To continue with the example, a thorough examination of the sales variance would be as follows:
“During the month, sales were $2,000 less than the budgeted amount of $10,000. This variation was primarily caused by the loss of ABC customer at the end of the previous month, who typically purchases $1,800 per month from the company. We lost ABC as a customer because we had several instances of late deliveries to it in recent months.”
This level of granularity in variance analysis enables management to understand why fluctuations occur in its business and what it can do to improve the situation.
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This glossary post was last updated: 13th April, 2022 | 0 Views.