Definition: Variance analysis is an analytical tool that managers can use to compare actual operations to budgeted estimates. In other words, after a period is over, managers look at the actual cost and sales figures and compare them to what was budgeted. Some budgets will be met and some will not.
What Does Variance Analysis Mean?
Most companies create budgets to track financial goals and improve efficiencies in both production and operations. Budgets help management establish benchmarks to measure future improvement. Most budgets start with estimated cost and sales figures. Management can set these estimates aggressively for goals for the company.
For instance, management might set a cost budget of 10 percent less than last quarter. The goal is to meet this budget, but some goals are not always met. Managers can track the process of these goals with variance analysis.
There are several important standard cost variances that are included in a typical variance analysis: cost variances, material variances, labor variances, and overhead variances. All of these variances look at the difference between what expenses were actually incurred for the period and what management set at the standard or budgeted expenses at the beginning of the period.
Managers also tend to look at price variances and quantity variances. Price variance measures the difference between actual and budgeted revenue based on the difference between actual and budgeted sales price per unit. Quantity variances deal with production levels comparing the actual amount of units produced and the budgeted units produced during the period.