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Chapter 14

Variance analysis

7.1 What is a variance?

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.

Before any meaningful comparison can be made the original budget
should be 'flexed' to the actual level of performance. This is necessary
in the calculation of variable cost variances.

7.2 Key components of effective variance analysis

 allocating responsibility

 keeping up-to-date standards

 flexing budgets for variable costs

 strong procedures for determining whether to investigate

 linking causes to the variance

 including feedforward control to improve future performance

 identifying trends which can be incorporated into strategic plans.

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