It refers to finding out deviation that occurs between planned and actual behavior. For example, an organization predicts 200 units’ sales in a given day, but it achieves 150. So, it will try to find out the reason for the deviation of 50 sales. Variance analysis typically involves the isolation of different causes for the variation in income and expenses over a given period from the budgeted standards.
Types of Variance-
a) Sales Volume
b) Sales Mix
c) Sales Quantity
d) Sales Price
e) Direct Material Price
f) Direct Material Usage
g) Direct Material Yield
h) Direct Labor
i) Variable Overhead
j) Fixed Overhead Total Variance
a) Planning, Standard and Benchmarks- It encourages forward thinking because to calculate the variance, an organization needs standards or planned behavior.
b) Control Mechanism- It highlights the variance which affects the financial performance of an organization. Thus, it also helps in making decisions regarding the financial stability of the organization.
c) Responsibility Accounting- It facilitates performance measurement and control at the departments, divisions, etc. For example, the procurement department shall be answerable in case of a substantial increase in the purchasing cost of raw materials.