Variance analysis refers to the investigation of deviations (differences) in financial performance from the standards defined in budgets. It involves the isolation of different causes for the variation in income and expenses over a given period from the budgeted standards.
In order to make variances meaningful, the concept of 'flexed budget' is used when calculating variances. Flexed budget acts as a bridge between the original budget (fixed budget) and the actual results.
Main types of Variance
1  Sales Variance  Sales Price Variance  Sales Volume Variance 
2  Material Variance  Material Price Variance  Material Usage Variance 
3  Labour Variance  Labour Rate Variance  Labour Efficiency Variance 
4  Variable Overhead Variance  Variable Overhead Spending Variance  Variable Overhead Efficiency Variance 
5  Fixed Overhead Variance  Fixed Overhead Spending Variance  Fixed Overhead Volume Variance

A – B = Sales Price Variance
B – C = Sales Volume Variance
NOTE : If answer is positive(+ve) – Favourable (F) , negative (ve) – Adverse (A)
Sales Price Variance is the measure of change in sales revenue as a result of variance between actual and standard selling price. Favorable sales price variance suggests higher selling price realized during the period than anticipated in the standard. Adverse sales price variance indicates that sales were made at a lower average price than the standard.
Reasons for favorable sales price variance may include:
Causes for adverse sales price variance may include:
Sales Volume Variance is the measure of change in profit or contribution as a result of the difference between actual and budgeted sales quantity. Favorable sales volume variance suggests a higher standard profit or contribution than the budgeted profit or contribution. Adverse sales volume variance indicated a lower standard profit or contribution than the budgeted profit or contribution.
Reasons for favorable sales volume variance include:
Causes for an adverse sales volume variance include:
A – B = Material Price Variance
B – C = Material Usage Variance
NOTE : If answer is positive(+ve) – Adverse (A), Negative (ve) – Adverse (A) – Favourable (F)
Direct Material Price Variance is the difference between the actual cost of direct material and the standard cost of quantity purchased or consumed. A favorable material price variance suggests cost effective procurement by the company. An adverse material price variance indicates higher purchase costs incurred during the period compared with the standard.
Reasons for a favorable material price variance may include:
Reasons for adverse material price variance include:
Direct Material Usage Variance is the measure of difference between the actual quantity of material utilized during a period and the standard consumption of material for the level of output achieved. A favorable material usage variance suggests efficient utilization of materials. An adverse material usage variance indicates higher consumption of material during the period as compared with the standard usage.
Reasons for a favorable material usage variance may include:
Reasons for adverse material usage variance include:
A – B = Labour Rate Variance
B – C = Labour Efficiency Variacance
NOTE : If answer is positive(+ve) – Adverse (A), Negative (ve) – Adverse (A) – Favourable (F)
Direct Labor Rate Variance is the measure of difference between the actual cost of direct labor and the standard cost of direct labor utilized during a period. A favorable labor rate variance suggests cost efficient employment of direct labor by the organization. An adverse labor rate variance indicates higher labor costs incurred during a period compared with the standard.
Reasons for a favorable labor rate variance may include:
Causes for adverse labor rate variance may include:
Direct Labor Efficiency Variance is the measure of difference between the standard cost of actual number of direct labor hours utilized during a period and the standard hours of direct labor for the level of output achieved. A favorable labor efficiency variance indicates better productivity of direct labor during a period. An adverse labor efficiency variance suggests lower productivity of direct labor during a period compared with the standard.
Causes for favorable labor efficiency variance may include:
Reasons for adverse labor efficiency variances may include:
Fixed Overhead Expenditure Variance, also known as fixed overhead spending variance, is the difference between budgeted and actual fixed production overheads during a period. Favorable fixed overhead expenditure variance suggests that actual fixed costs incurred during the period have been lower than budgeted cost. Adverse fixed overhead expenditure variance indicates that higher fixed costs were incurred during the period than planned in the budget.
Reasons for a favorable variance may include:
An adverse variance may be caused by the following:
Fixed Overhead Volume Variance quantifies the difference between budgeted and absorbed fixed production overheads. Fixed Overhead Volume Variance is the difference between the fixed production cost budgeted and the fixed production cost absorbed during the period. The variance arises due to a change in the level of output attained in a period compared to the budget. The variance can be analyzed further into two subvariances:
Fixed Overhead Capacity Variance calculates the variation in absorbed fixed production overheads attributable to the change in the number of manufacturing hours (i.e. labor hours or machine hours) as compared to the budget.
The variance can be calculated as follows:
Fixed Overhead Capacity Variance = (budgeted production hours  actual production hours) x FOAR*
Fixed Overhead Efficiency Variance calculates the variation in absorbed fixed production overheads attributable to the change in the manufacturing efficiency during a period (i.e. manufacturing hours being higher or lower than standard ).
The variance can be calculated as follows:
Fixed Overhead Efficiency Variance = (standard production hours  actual production hours) x FOAR*
*FOAR = Fixed Overhead Absorption Rate / unit of hour