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Variance Analysis in Management Accounting

Variance Analysis in Management Accounting

In managerial accounting, variance analysis involves the examination of the variation or deviation in financial performances from the set standards in an organization. It is an investigation of the variation between the actual and the planned behaviour. Variance analysis in managerial accounting is considered important as it helps to maintain a control over the business. additionally, it gives the picture of the overall over-performance of under-performance of the business over a particular period of time. The variation is identified by comparing the actual results with the set standards. For instance, in comparing costs, if the actual cost is lower than the standard cost, the variation is considered favourable and vice-versa.

Types of Variances in Management Accounting

Here are the most commonly derived variances analysis in management accounting

Sales price variances: this implies the changes realized in the sales revenue, due to the variations between actual and standard selling price

Sales volume variance: this is the difference observed in profit due to variation between actual and budgeted sales quantity.

Direct material price variation: it is the difference between the actual cost and standard cost of the material quantity purchased.

Direct Labour rate variance: this is the difference between the actual cost and direct cost of direct labour used in a particular production period

Variable overhead variance: this is the difference between the variable production overhead incurred and the standard variable overhead expense during a particular period.

Fixed overhead variance: this is the difference between the actual overhead and absorbed fixed overhead in a particular production period.

Basics in Calculating Variance Analysis

The variance analysis in management accounting concentrates on identifying the cause of the variation in income and expenses during the period considered. The variance analysis is made meaningful by the concept of ‘flexed budget’. The flexed budget is made in retrospect of the actual budget. In this case, the sales volume variance is considered as the difference between the budgeted and flexed budget profit. All the other variances are considered as the difference between the actual budget and flexed budget.

Functions and importance of Variance analysis in Management Accounting

The variance analysis is considered as vital component of the information system in an organization. It helps in planning, setting standards and benchmarks. Therefore, it a mechanism advocating for proactive approach in setting the performance of a firm. It also inculcates ‘management by exception’ by highlighting the deviation of the firm from the set standards, which influences the overall performance of the organization.