Going by the statement presented by ICWA, London, variance refers to a difference between standard costs and actual costs that are incurred during a certain time period. This is one of the most important facets in regards to Standard Costing, where a predetermination of such variance is important for analysing costs that are presented for corrective measures in a business unit.
In Standard Costing, this analysis is strictly used to find out difference between standard cost and actual cost that is incurred. To accurately find this, total variance is to be subdivided.
Computation of Variances:
The general variances that are computed by any organisation are:
MCV (Material Cost Variance) = (SQ X SP) – (AQ X AP)
MUV or MQV (Material Usage Variance) = (SQ – AQ ) x SP
MMV (Material Mix Variances )= (RSQ – AQ) x SP
MPV (Material Price Variance) = (SP – AP) X AQ
MYV (Material Yield Variance) or MSUV = (SQ- RSQ)
Labour cost variance = (SH X SR) – (AH X AR)
Types of Variances:
The cause of controllable variances, rest in internal factors, where it occurs from inefficiency of cost centre as an individual or department. These include excess usage of materials or excess time taken.
The uncontrollable factors arise from external issues that are beyond managerial control. Decisions of government authorities are the best in this regard.
In case of favourable or positive variance, actual cost is less than standard cost.
Whereas unfavourable variance results from actual cost being greater than standard cost.
Thus, on the basis of this analysis, a business unit’s position can be determined.