What are the different types of variances in variance analysis?

Types of variances in variance analysis

If you’re involved in finance or accounting, you’ve probably heard of variance analysis.

It’s a powerful tool that helps you understand the differences between your actual results and your budgeted or expected results.

But did you know that there are different types of variances? Understanding these variances can help you identify the root causes of your financial performance and make better decisions going forward.

Getting Started

This guide is for anyone involved in finance or accounting who wants to improve their understanding of variance analysis.

Whether you’re a seasoned professional or just starting out, this guide will help you understand the different types of variances and how to use them to improve your financial performance.

How To

1. Identify the type of variance: There are four main types of variances: price variances, quantity variances, efficiency variances, and volume variances. Identify which type of variance you’re dealing with before proceeding.
2. Calculate the variance: Once you’ve identified the type of variance, you need to calculate the actual variance. This involves subtracting the budgeted or expected result from the actual result.
3. Analyze the variance: Once you’ve calculated the variance, you need to analyze it to understand the root cause. This may involve looking at factors such as production processes, pricing strategies, or sales volumes.
4. Take action: Once you’ve identified the root cause of the variance, you need to take action to address it. This may involve changing your production processes, adjusting your pricing strategies, or increasing your sales volumes.

Best Practices

• Understand the different types of variances and how they relate to your financial performance.
• Regularly perform variance analysis to identify areas for improvement.
• Involve key stakeholders in the variance analysis process to ensure buy-in and support for any actions taken.
• Continuously monitor your financial performance and adjust your strategies as necessary.

Examples

Let’s say you’re the CFO of a manufacturing company that produces widgets.

You’ve just completed your monthly variance analysis and have identified a negative efficiency variance in your production process.

After further analysis, you discover that the cause of the variance is a bottleneck in your production line.

You decide to invest in new equipment to address the bottleneck and improve your production efficiency.

As a result, your next month’s variance analysis shows a positive efficiency variance, indicating that your investment was successful.

Originally published at Smart Accounting Kit.
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