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Variance Analysis

What is a variance analysis template?

Variance analysis, in a nutshell, is the study of the difference between actual numbers against planned numbers. The results, or the 'variance' then demonstrates the level of performance that a business, or business unit, has achieved.

It is a quantitative form of analysis and can allow an organization to see and understand the variabilities that have occurred.

What are the types of variance analysis?

There are a range of different things that variance analysis can be applied to, some of which include:

  • Purchase Price Variance: This type of variance involves the difference between the price paid for an item against its standard price, then multiplied by the number of units purchased. If the analysis returns a positive figure, then actual costs are shown to have increased, while the inverse indicates a decline in these costs.

  • Labour rate variance: This quantifies the difference between the actual cost of labour, versus the expected cost. A favourable variance shows that the cost of labour was less than planned. This type of variance analysis is used to plan and develop future budgets. It can also measure the performance of bargaining employees who negotiate with the company unions.

  • Variable Overhead Spending: Simply, this is the difference between the actual variable overhead and the standard variable overhead based on that which has been budgeted.

  • Fixed Overhead Spending: This is the variance of the actual fixed overhead cost versus the budgeted expenditure.

  • Selling Price Variance: This is calculated by subtracting the budgeted selling price from the actual selling price, multiplied by the units sold. The budgeted price is developed by the sales or marketing units.

  • Material Yield Variance: This is the variance of the actual amount of material used verses the predicted amount to be used, multiplied by the standard material cost. The predicted values are normally made by engineering units and are based on a variety of things, such as raw materials quality and scrap rates.

  • Labour Efficiency Variance: This variance analysis measures the productivity and efficiency of labour. This is particularly useful in pinpointing the specific business units that are performing at a rate lower to that which has been predicted or expected by an organization. If an unfavourable variance is produced, there will often be an examination into the process.

Variable Overhead Efficiency Variance: This is the variance between the actual hours worked and those that were budgeted.

The differing types of variance analysis have differing levels of importance depending on the type of company. For example, a company within the manufacturing industry will be primarily concerned with purchase price variance.

What are the problems with variance analysis?

There are problems that are associated with conducting variance analysis, and thus many organizations refrain from using it:

Reporting delay: The accounting staff compiling the variance data cannot do so at the pace required for many management teams. Businesses thus rely on other types of analyses.

Cost of conducting variance analysis: As the information needed is often not centralised, it can take significant time for the accountants to compile and present results.

To discover more about variance analysis, please refer to these links:

Variance Analysis Overview

Limitations of Variance Analysis

Role of Variance Analysis

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