Variance analysis is a financial management tool used to analyze the differences (or variances)
between budgeted and actual figures in a business or organization's performance. It helps
managers understand why performance deviates from expectations and provides insights into
areas that need corrective actions.
Types of Variance Analysis:
1. Sales Variance:
o Sales Price Variance: The difference between the actual sales price and the
expected sales price, multiplied by the actual quantity sold.
o Sales Volume Variance: The difference between the actual quantity sold and the
expected quantity, multiplied by the budgeted price.
Formula:
o Sales Price Variance = (Actual Price - Budgeted Price) × Actual Quantity
o Sales Volume Variance = (Actual Quantity - Budgeted Quantity) × Budgeted Price
2. Cost Variance:
o Direct Material Variance: Analyzes the difference between the actual cost of
materials used and the expected cost based on standard usage.
▪ Material Price Variance: (Actual Price per Unit of Material - Standard Price
per Unit of Material) × Actual Quantity Used
▪ Material Usage Variance: (Actual Quantity Used - Standard Quantity
Allowed) × Standard Price
o Direct Labor Variance: Analyzes the difference between the actual labor costs and
the expected costs based on standard labor rates and hours.
▪ Labor Rate Variance: (Actual Labor Rate - Standard Labor Rate) × Actual
Hours Worked
▪ Labor Efficiency Variance: (Actual Hours Worked - Standard Hours
Allowed) × Standard Labor Rate
o Variable Overhead Variance: Analyzes variances related to variable overhead costs
(such as utilities, indirect materials, etc.).
▪ Variable Overhead Spending Variance: (Actual Variable Overhead -
Budgeted Variable Overhead) × Actual Activity Level
▪ Variable Overhead Efficiency Variance: (Actual Hours - Standard Hours) ×
Standard Variable Overhead Rate
o Fixed Overhead Variance: Analyzes the difference in fixed overhead costs (e.g.,
rent, salaries).
▪ Fixed Overhead Budget Variance: The difference between the actual fixed
overhead and the budgeted fixed overhead.
▪ Fixed Overhead Volume Variance: The difference due to the number of
units produced, compared to the expected output.
3. Profit Variance: This is the overall difference between the actual profit and the budgeted
profit. It’s derived from the sum of sales variances and cost variances.
Formula:
o Profit Variance = (Actual Profit - Budgeted Profit)
