Variance

Variance is a term frequently used in Management or Cost Accounting.

It is used to highlight the differences between standard costs and actual costs. The variance may be highlighted in units or in dollars. For example, the standard cost of a product may be 2.5 labor hours, but if the actual time spent was three hours, the product would be said to have an unfavorable variance of 0.5 hours. If the labor rate was $20.00 per hour, the labor variance would be $10.00

Now, suppose the actual labor rate was $25.00 per hour, there would be a labor rate variance of ($25.00-$20.00) x 2 hours or $10.00.

We now have a labor variance of $10.00 and a rate variance of $10.00 also. In addition we have a $5.00 unfavorable variance that is a mixture of rate and time.

Analysis of variances assists management in determing the cause of the cost overrun. The extra hours point could point to a problem in efficiency whereas the rate variance may indicate that lower cost workers could be used to assemble the product.