Lecture on Variance Analysis

Introduction

• Variance analysis involves comparing planned and actual numbers to assess performance.
• It is used to determine over-performance or under-performance during a reporting period.
• Essential for understanding cost management within a company.

Components of Variance Analysis

• Planned vs. Actual Costs: Used to assess favorability by comparing actual costs to industry standards.
• Price and Quantity Variances:
  • Price variance: Difference due to cost savings or additional expenditure.
  • Quantity variance: Arises when more or fewer materials/labor are used than planned.

Role of Variance Analysis

• Management tool for identifying unusual or significant variances.
• Helps in problem identification and performance improvement.

Types of Variances

• Materials Variance: Compares cost and quantity of materials used.
• Labor Variance: Examines differences in labor costs and hours worked.
• Variable Overhead Variance: Analyzes costs associated with variable overheads.
• Fixed Overhead Variance: Includes budget and volume variances.

Methodologies

• Column Method: Simplifies calculations by organizing data in columns for easy variance computation.
• Example (XYZ Company):
  • Standard costs and actual costs are compared for materials, labor, and overheads.
  • Identifies favorable or unfavorable variances and prompts management review.

Templates and Resources

• CFI provides free Excel templates for variance analysis.
• Resources available for deepening knowledge in financial modeling and variance analysis.

Standards in Variance Analysis

• Standards serve as benchmarks for evaluating performance in cost accounting.
• Encompasses both quantity and cost standards for materials, labor, and overhead.

Related and Additional Resources

• CFI offers extensive courses and certifications in finance, enhancing technical skills for professionals.
• Additional resources available for deep dives into financial statement analysis, financial accounting theory, and more.

Certification Programs

• CFI offers the FMVA certification, focusing on skills like financial modeling, valuation, and business strategy.
• Emphasizes developing a well-rounded skill set for financial analysts.