After the standard costs have been set, the next step is to ascertain the actual cost of each element and compare them with the standard already set. The difference of actual from the standard is Variance. While setting standard specific method of production is to be kept in mind. If a different method of production is adopted, it gives rise to a different amount of cost, thereby causing variance, known as method variance. In standard costing, Variance means the difference between a standard cost and the comparable actual cost incurred during a period. Variance analysis is the process of analysing variances by sub-dividing the total variance in such a way that management can assign responsibility for any off-standard performance. Thus, variance analysis means the measurement of the deviation of actual performance from the desired performance.
Variance may be favourable or unfavourable depending upon whether the actual cost is less or more than the standard cost. If the actual cost is less than the standard cost, the variance is termed as ‘favourable’ and if the actual cost is more than the standard cost, variance is called as ‘unfavourable’ or ‘adverse’ variance. The effect of favourable variance increases the profit and it is a sign of efficiency of the organisation. On the other hand, unfavourable variance refers to the loss of the business and it is a sign of inefficiency of the organisation.
The variance may be classified as Controllable and Uncontrollable. Variance is said to be controllable if it is identified as the primary responsibility of a particular person or department. The excessive use of materials or labour hours than the standards can be attributable to a particular person. When the variations are due to the factors beyond the control of the concerned person or department, it is said to be uncontrolled. The rise in prices of materials, increase in wage rates, Govt. restrictions etc., are the examples of uncontrollable variance. These factors are not within the control of the management and the responsibility of the variance cannot be assigned to any particular person or division. The division of variance into controllable and uncontrollable is important from the view point of management as it can place more emphasis on controllable variance and thus facilitates to the principle of management by exception. Standard costing to be more realistic, sometimes the standards set are to be revised on account of changes in uncontrollable factors like wages, materials etc. To take into account these factors into variance, a ‘revised variance’ is created and the basic standard is allowed to continue. This revision variance is the difference between the standard cost originally set and the revised standard cost.
Finding variance is not the ultimate objective of the standard costing. But their analysis and finding the causes of variance is the ultimate aim to control cost. Control of cost depends on the corrective action taken by the management. The analysis of variance helps the management to locate deficiency and assign responsibility to particular person or cost centre. The next step of the management is to find out the reason for the variance to pin points where necessary, corrective action should be taken over.
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