5 2016-03-21 Febmat.com

# Variance analysis

Last updated: 21.03.2016

**The purpose of variance analysis is to ascertain the quantitative deviation between budgeted, forecasted or otherwise estimated figures and accounting actuals and analyze this deviation into bigger detail. It is a valuable control mechanism.**

**Factors to consider when deciding whether it is worth to investigate the variance**:

**materiality**– small variances are usually either not analyzed or analyzed only to lower extent. Materiality levels can be defined:- in absolute figures – e.g. variances over € 100 are investigated
- in % - e.g. variances over x% from budgeted figure are investigated
- are not defined and analysts evaluate their significance subjectively

**controllability**–uncontrollable variances shall be given lower care than to controllable**whether the variance is favorable or unfavorable**– investigation is more about unfavorable variances**trend**– if the monthly (or other period) variances keep showing a trend, it is certainly worth further analyses**standards used in budget preparation**– if for exampleis used, the variances are expected to be unfavorable__ideal standard__**the cost of variance investigation should not exceed the benefits**resulting from the possible remedial action (28)**interrelationship of variances**– one variance can be related with another and it therefore depends on their cumulative effect. For example:- using poor-quality material can cause:
- favorable direct material price variance
- unfavorable direct material quantity variance (more wastage)
- unfavorable direct labor quantity variance (worse handling)

- more qualified staff can result in:
- unfavorable direct labor rate variance (higher wages)
- favorable direct material quantity variance (less wastage)
- favorable direct labor quantity variance (less hours necessary to produce the same output)

- using poor-quality material can cause:

**In general, direct costs, revenues and margin variances can be split into**:

**price variance**

* Calculation*: (actual unit price – budgeted unit price) x actual quantity

* Interpretation*: reveals how much the costs/revenues/margin changed as the consequence of the changed price (unit margin).

**quantity (or volume or usage) variance**

* Calculation*: (actual quantity – budgeted quantity) x budgeted unit price

* Interpretation*: reveals how much the costs/revenues/margin changed as the consequence of the changed quantity sold/produced.

**More detailed variance calculations can be found here:**

Variable production overheads variance

Fixed production overheads variance