Variance Analysis

last edited by: Anupam Ganguly on Nov 29, 2016 7:58 AM login/register to edit this page

Contents
1 Application
2 Procedures
3 Instructions
4 Example
5 References

Variance analysis is the quantitative investigation of the difference between actual and planned behavior. This technique is used for determining the cause and degree of difference between the baseline and actual performance and to maintain control over a project.

Cost and schedule variances are the most frequently analyzed measurements.

Some of the most commonly-derived variances used in variance analysis are:

  • Purchase price variance. The actual price paid for materials used, minus the standard cost, multiplied by the number of units used.
  • Labor rate variance. The actual price paid for the direct labor used, minus its standard cost, multiplied by the number of units used.
  • Variable overhead spending variance. Subtract the standard variable overhead cost per unit from the actual cost incurred and multiply the remainder by the total unit quantity of output.
  • Fixed overhead spending variance. The total amount by which fixed overhead costs exceed their total standard cost for the reporting period.
  • Material yield variance. Subtract the total standard quantity of materials that are supposed to be used from the actual level of use and multiply the remainder by the standard price per unit.
  • Labor efficiency variance. Subtract the standard quantity of labor consumed from the actual amount and multiply the remainder by the standard labor rate per hour.
  • Variable overhead efficiency variance. Subtract the budgeted units of activity on which the variable overhead is charged from the actual units of activity, multiplied by the standard variable overhead cost per unit.
Other types of variances are

  • Material Price Variance
  • Material Usage Variance
  • Material Mix Variance
  • Material Yield Variance
  • Labor Idle Time Variance
  • Fixed Overhead Volume Capacity & Efficiency Variance
  • Fixed Overhead Total Variance

Application

Variance analysis is especially effective when you review the amount of a variance on a trend line, so that sudden changes in the variance level from month to month are more readily apparent.

Variance analysis also involves the investigation of these differences, so that the outcome is a statement of the difference from expectations, and an interpretation of why the variance occurred.

Procedures

Calculating variances facilitates comparison of like with like. Hence, we can compare the actual expenditure incurred during a period with the standard expenditure that 'should have been incurred' for the level of actual production.

Variance Analyses can be performed by comparing planned activity cost against actual activity cost to identify variances between the cost baseline and actual project performance. Further analysis can be performed to determine the cause and degree of variance relative to the schedule baseline and any corrective or preventative actions needed.

Cost performance measurements are used to assess the magnitude of variation to the original cost baseline. An important aspect of project cost control includes determining the cause and degree of variance relative to the cost baseline and deciding whether corrective or preventive action is required

Instructions

A project management team will focus on the variables of scope, cost, and schedule in its variance analysis. Each of these are affected by different factors, and, in order to figure out the nature of the variance as a whole, it is necessary to figure out why, exactly, each of the constituent elements varies from expectation.

Example

For example, if you budget for the project to be $100,000 and actual cost are $120,000, variance analysis yields a difference of $20,000.

References

  1. Variance Analysis (Management Accounting Techniques). Colston West, Elizabeth Harris. CIMA Publishing, 1 December, 1997.
  2. Analysis of Variance in Experimental Design (Springer Texts in Statistics). Harold R. Lindman. Springer Publishing, 1 December, 2011.


last edited by: Anupam Ganguly on Nov 29, 2016 7:58 AM login/register to edit this page


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