Variance Analysis

Variance Analysis is the study of deviations of actual behavior versus forecasted or planned behavior in budgeting or management accounting. This is essentially concerned with how the difference between actual and planned behaviors indicates how business performance is being impacted. Variance analysis can be broken down into 2 steps: 1. Calculating and recording individual variances 2. Understanding the cause of each variance[1]

Variance analysis is a financial analysis tool used to measure the difference between actual results and expected results. It is used to identify and correct budgeting inaccuracies, analyze service delivery, identify unfavorable labor costs, and compare overhead costs with expectations. This cycle helps managers understand if their expectations were realistic, identify potential problems before they become too costly, and take corrective measures when necessary. Variance analysis is important for maintaining control over a business's finances, as it enables businesses to assess the impact of any changes that have been made in order to ensure that these changes are beneficial in the long run. Through variance analysis, organizations can discover areas of improvement and make necessary changes to maintain control over business activities.

Variance analysis is an important process that helps to ensure the accuracy of a company's financial results. Through analyzing both positive and negative variances, businesses are able to assess the consistency of their financial results with their historical trends. This allows them to determine whether their rate proposals and cost-effectiveness are accurate. By setting thresholds for materiality, FP&A analysts can investigate each variance and make sure that discrepancies do not go unnoticed. Variance analysis also offers insight into how a business is performing, allowing them to make adjustments as needed in order to maintain steady growth and reach desired goals.

The most common variances used in variance analysis are purchase price variance, labor rate variance, variable overhead spending variance, and fixed overhead spending variance. These variances are important as they allow managers to identify where costs may have been over or under-budgeted and where sales may have been over or under-estimated. They also provide valuable insights into the efficiency of operations by comparing actual amounts of labor and activity used against standard amounts. Variance analysis helps managers identify problems within a company’s performance and take action to improve it.

To prevent variances, management can compare like with like and analyze any deviations from the standard cost or schedule. Cost performance measurements should be used to assess the magnitude of the variation compared to the original plan. If variance is identified, corrective or preventive action may be required based on findings from variance analysis. Additionally, timely corrective actions should be taken whenever possible to ensure that project costs remain within expectations.

See Also

  1. Definition - What is Variance Analysis? Economics Times