Types of Variance

In cost accounting, variance is very important to evaluate the performance of company for increasing its efficiency. In variance analysis, we compare actual and standard cost and revenue to know whether it is favorable or unfavorable. Favorable variance ( F ) shows that standard cost is less than actual cost or standard revenue is more than actual revenue. But unfavorable or adverse ( U or A ) variance shows that actual cost is more than standard cost or actual revenue is less than standard revenue. Types of variance are the steps to deep study of variance. We classify variance with following ways.

1st Type of Variance: Direct Material Variance

Direct material variance shows the difference between the actual cost of material of actual units and standard cost of material of standard units. It is also the total of material price variance, material quantity variance. If there is favourable material quantity variance and unfavourable material price variance or vise-versa, direct material cost may be either favourable or unfavourable because it is total of material price and material quantity variance.

2nd Type of Variance: Labor Variance

Labor variance shows the variance of labor cost. It is the difference between standard cost of labor for actual production and the actual cost of labor for actual production.

3rd Type of Variance: Overhead Variance

Overhead Variance shows the variance of all indirect cost. It is the difference between standard cost of overhead for actual output and actual cost of overhead for actual output.

4th Type of Variance: Sales Variance

Sales variance is that type of variance which shows the difference between actual sales and standard sales. But in unfavourable sales variance, our standard sale is less than actual sale. Sales variance is good way to calculate the responsibility of sales department.

Related : Standard Costing