Page 119 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting Pooja, Lovely Professional University

Notes Unit 7: Variance Analysis

CONTENTS

Objectives
Introduction
7.1 Meaning and Importance of Variance Analysis
7.2 Kinds of Variances
7.2.1 Material Variances

7.2.2 Labour Variances
7.2.3 Overhead Variances
7.2.4 Sales Variances
7.3 Summary

7.4 Keywords
7.5 Review Questions
7.6 Further Readings

Objectives

After studying this unit, you will be able to:

Explain the meaning and importance of variance analysis
Illustrate the 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.’
1. Computation of individual variances, and
2. Determination of the cause(s) of each variance.

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

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