Variance

Definition

Variance is the difference between actual costs and standard costs in managerial accounting. It is used to measure performance and identify areas where financial performance deviates from expectations.

5 Must Know Facts For Your Next Test

1. Variances can be favorable (F) or unfavorable (U), indicating whether actual costs were lower or higher than standard costs, respectively.
2. A common type of variance analysis includes material, labor, and overhead variances.
3. Material price variance measures the difference between the actual cost per unit of material and the standard cost per unit.
4. Labor efficiency variance assesses how efficiently labor was used compared to the standard hours expected for actual production levels.
5. Overhead variances are divided into variable overhead variances and fixed overhead variances, each focusing on different aspects of production costs.

Review Questions

• What does a favorable variance indicate about actual costs compared to standard costs?
• How does material price variance differ from labor efficiency variance?
• Why might a company analyze both variable and fixed overhead variances?

Related terms

Standard Cost:

The pre-determined cost of manufacturing a single unit or performing a service, based on expected efficiencies and resource usage.

Material Price Variance:

The difference between the actual cost paid for materials and the expected (standard) cost.

Labor Efficiency Variance:

The measure of how efficiently labor was utilized during production, calculated as the difference between actual hours worked and standard hours allowed.