Concepts Behind Variance Analysis

Variance in simple language means deviation, i.e., when there is a difference between the planned and the actual. In accounting, variance is generally used for budgetary control. They are generally used for cost and revenue calculations.

Variance analysis refers to analyzing why there is a variation in the planned activity and the actual activity. It means carefully analyzing each process in the way and figuring out a solution and bringing the actual as close as possible to the standards or the planned.

Variance analysis focuses on two aspects, causes of the variation and the amount of the variation. In order to arrive to a conclusion there are two factors that are kept in mind for the variation. First is calculating the variation of individual variance. Second is determining the relevance of each variance. Sometimes the difference might be such that it can be neglected and is allowed as a variation. These types of variations are considered relevant in Variance Analysis.

There are different types of variances that are calculated for various institutions. The main ones are as follows:

1. Were the planned standards too high or unrealistic to achieve?

2. Has there been a complete change in the business environment such that the standards have become obsolete and are no longer achievable?

3. Has inflation increased more than calculated which has led to the variation?

4. Have the different departments of the organization not delivered their expected output which has affected the business activity?

5. Have the machinery or capital used not been adequate in order to achieve the planned results?

These are just basic overview questions and there are several other checks done in different types of organizations as per their level of activity in order to carry out the analysis.

There are different types of variances that are calculated for various institutions. The main ones are as follows:

1. Material Variances: They are calculated for the difference in the cost of the materials produced or purchased from the originally planned costs. It is also calculated for the difference in actual quantity consumed to planned quantity.

2. Labor Variances: They are calculations for variation in actual wages to laborers in comparison to the standards planned earlier. This usually happens if the workers have to work overtime or unplanned recruitment or even high labor turnover which was not foreseen. Labor hours calculated and planned may vary from the actual hours leading to a variance in labor wages.

3. Overhead Variances: It includes differences in actual overhead cost and budgeted overhead cost. It can further be divided into Direct and Indirect overheads and also into Fixed and Variable overheads depending on the type of organization conducting the variance analysis and their nature of business.

Variance Analysis helps the management of the company of how to compute costs for the future and set more realistic standards which are achievable as well. It also gives them a picture of whether the organization is working in its full capacity and if there is a scope of improvement.

Difficulties Encountered In Variance Analysis

While calculating variances and formulating variance analysis for any organization, it is very difficult to identify all the transactions and figure out what the cause of the variance is. There are complex formulas involved for calculating each type of variance and a different type of research is involved to know about each type of variance that occurs.

This makes the students think that Variance Analysis is extremely complicated as it requires both mathematical skills as well as logical skills. In addition to that, research skills are also equally needed. Every transaction needs to be analyzed carefully and determined if it was the cause of the variance or not. The problems given in Variance Analysis are usually long and complex making it very challenging and tough to solve without stressing out for the students. The calculations are equally tough as well.

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