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Variance Analysis


Variance means difference. The term variance has been derived from the verb ‘to vary’ meaning to differ. The real picture of the standard costing to the management is the presentation of variances. In the practical sense, sometimes standard costing is meaningless because without the predetermination and analyzing the variances of cost. In standard costing, variance analysis means investigating the differences between the standard cost and the actual cost. ICWA, London defines variance as “difference between a standard cost and the comparable actual cost incurred during a period”.

Simply variance analysis is the process of examining the variances by sub dividing the total variance. Through this way, the organisation can fix responsibility for off-standard performance.

Favourable and Unfavourable Variances

When the actual cost incurred is less than the standard cost, the differences is known as favorable variance. It is also known as positive variance.

When the actual cost incurred is more than the standard cost, the difference is known as unfavourable or adverse variance. It is also known as negative or debit variance.

Controllable and Uncontrollable Variances

Variances are classified into controllable and uncontrollable variances.

Controllable variances are those which arise due to inefficiency of a cost centre i.e. individual or department. For example, excess usage of materials, excess time taken by worker etc. is the relevant examples of controllable variance. Uncontrollable variances are those variances which arise due to factors beyond the control of the management or concerned person or department of the organisation.

Uncontrollable variances normally arise due to the external factors only. For example, government restrictions, change in the market price etc. Whenever uncontrollable variance arises, no particular individual can be held responsible for it.

The ultimate aim of the standard costing is the effective cost control.



Normally, the following are the common variances which are computed by the management.

(a)    Material variances

(b)   Labour variances

(c)    Overhead variances

(d)   Sales variances.

Computation of the above variances with the help of the following formula.

(a) Material Variances

(i)                 MCV = (SQ X SP) – (AQ X AP)

(ii)               MPV = (SP – AP) X AQ

(iii)             MUV or MQV = (SQ – AQ ) x SP

(iv)              MMV = (RSQ – AQ) x SP

(v)               MYV or MSUV = (SQ- RSQ)

Abbreviations used :

MCV                                Material Cost Variance

MPV                                 Material Price Variance

MUV OR MQV :             Material Usage Variance

or Material Quantity Variance

MMV                                Material Mix Variances or

MYV                                 Material Yield Variance

MSUV                              Material Sub Usage Variance


(b) Labour Variances

(i) Labour cost variance = (SH X SR) – (AH X AR)

(ii) Labour rate variance = (SR –