Page 167 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting Gopika Juneja, Lovely Professional University

Notes Unit 9: Variance Analysis

CONTENTS

Objectives
Introduction
9.1 Meaning and Importance of Variance Analysis
9.2 Kinds of Variances
9.2.1 Material Variances

9.2.2 Labour Variances
9.2.3 Overhead Variances
9.2.4 Sales Variances
9.3 Summary

9.4 Keywords
9.5 Review Questions
9.6 Further Readings

Objectives

After studying this unit, you will be able to:
Explain the meaning and importance of variance analysis

Compute the different kinds of variances
Introduction

In standard costing, variance means the difference between the standard cost and the actual
cost. Variances of different cost items provide the key to cost control. They indicate whether and
to what extent standards set have been achieved. This enables management to correct adverse
tendencies.

The terminology of ICMA London, defines variance as, “Difference between a standard cost and
the comparable actual cost incurred during a period.” Variance for each element of cost should
be ascertained regularly. If the actual cost is less than the standard cost, it is termed as ‘favourable
variance. On the other hand, if the actual cost is more than the standard cost, it is known as
‘adverse’ or ‘unfavourable variance.’
(a) Computation of individual variances, and
(b) Determination of the cause(s) of each variance.

9.1 Meaning and Importance of Variance Analysis

The term “Variance” means deviation, difference and so on. The variance in accordance with
standard costing is meant as the difference/deviation in between two different costs viz standard

cost and actual cost. According to ICWA, London defines the variance as “deviation in between the
standard cost and comparable actual cost incurred during the period.” The variance of the specifi c

element of cost should be periodically checked. The variance is classified into two categories.

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