Accounting & auditingLesson 5 of 5 in the course Managerial and cost accounting

Variance Analysis: Favorable and Adverse Results

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

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Summary

A variance is the difference between a planned or budgeted amount and the actual result. Understanding variances helps managers evaluate performance, investigate why results differed from expectations, and make better decisions about future costs and revenues.

In budgeting and management accounting, a variance is the difference between a budgeted, planned, or standard amount and the actual amount incurred or sold. Variances can be calculated for both costs and revenues.

All flashcards

What is a variance?
The difference between a budgeted, planned, or standard amount and the actual amount incurred or sold.
What does a favorable variance indicate?
Actual results are better than expected; lower costs or higher revenue are generally favorable.
What is an adverse variance?
A variance in which actual results are worse than expected; it is also called unfavorable.
How can a direct labor cost difference be analyzed?
It can be divided into labor rate and labor efficiency variances.
What is the purpose of variance analysis?
To assess differences between planned and actual results, investigate causes, and support performance evaluation and control.

Quiz questions

  1. Which two components may be used to analyze a direct material cost difference?Answer: A materials price variance and a materials usage variance.
  2. Which components may be used to analyze manufacturing overhead differences further?Answer: Spending, efficiency, and volume variances.
  3. A business earns less sales revenue than planned. How is this result generally classified?Answer: As an adverse or unfavorable variance.
  4. What does a variance amount alone tell a manager?Answer: How far actual performance differs from the plan, but not why.
  5. Which type of variance concerns differences in variable manufacturing overhead?Answer: A variable production overhead variance.

Based on the Wikipedia article Variance (accounting), licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.

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