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Standard costing
Variance analysis
2.1 What is a variance?
In budgetary control, we saw that variances were calculated by comparing the actual
costs to the flexed budget cost. In standard costing, variances are calculated in the
same way, although more detailed variance analysis is possible.
Total cost variances can be broken down to explain how much of it is caused by the
usage of resources being different from the standard, and how much of it is caused
by the price of resources being different from the standard.
If resource price or usage is above standard, or if sales volume or selling price is
below standard, an adverse variance will result. If resource price or usage is below
standard, or if sales volume or selling price is above standard, a favourable variance
will result.
A variance is the difference between actual results and the budget or
standard.
Taken together, cost and sales variances can be used to explain the
difference between the budgeted profit for a period and the actual profit.
When actual results are better than expected results, a favourable
(F) variance occurs.
When actual results are worse than expected results, an adverse
variance (A).
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