Q:

# What is variance analysis ?

A:

Variance analysis accounts for discrepancies between planned events and what actually takes place. It is generally performed at the end of each fiscal month and reported to management. Variance analysis is particularly useful in markets with consistent monthly trends.

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Variance analysis takes many different forms and is implemented based on the needs of the industry using it. For example, purchase-price variance compares the actual cost for materials with the standard industry cost and multiplies it by the amount of units used. This form of variance analysis is useful for manufacturers. Labor-efficiency variance deducts the industry standard of labor from the actual labor used and multiplies the remaining amount by the hourly standard rate. Labor-efficiency variance is often employed during contracted projects or by companies with a lot of employees.

Variance analysis is not typically used in fast-paced industries. Management often needs to rectify discrepancies immediately. The large amount of data analysis performed by staff accountants is not usually cost-effective. Variance source information can be disorganized, causing the need for more research time. Finding variances once a month is a less desirable option for most companies than daily analysis. Management utilizes variance analysis only when an immediate solution for the variances is possible.

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