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Cost variance is the difference between standard cost and the actual cost incurred.
Variance analysis is the analysis of the cost variances into its component parts with appropriate justification of such variances, so that we can approach for corrective measures.
Classification of Variances
Variances can be established under material, labour & overheads. There are three distinct groups of variances that arise in standard costing which are
1) Variances of Efficiency
Variances due to the effective or ineffective use of materials quantities, labour hours, once actual quantities are compared with the predetermined standards.
2) Variances of Price Rates
Variances arising due to change in unit material prices, standard labour hour rates and standard allowances for indirect costs.
3) Variances Due to Volume
Variance due to the effect of difference between actual activity and the level of activity assumed when the standard was set.
