Lesson 69 - Intermediate Accounting Course 

69. Variance Analysis and Performance Measurement

Variance analysis is a crucial tool in cost accounting and financial management that helps businesses compare actual financial performance against budgeted expectations. It enables managers to identify deviations (variances) and take corrective action.

1️⃣ What is Variance Analysis?

Variance analysis measures the difference between planned (budgeted) financial figures and actual results to evaluate business performance.

🔹 Formula for Variance:

🔹 Types of Variances:

• Favorable Variance (F): When actual results increase profits compared to the budget.
  
  

• Unfavorable Variance (U): When actual results reduce profits compared to the budget.

2️⃣ Types of Variances

🔹 Sales Variance

Compares actual revenue with budgeted revenue to assess performance.

✅ Favorable: Higher sales than expected.
❌ Unfavorable: Lower sales than expected.

🔹 Cost Variance

Analyzes differences in expenses, often broken down into:

a) Direct Material Variance

Measures cost differences in raw materials.

✅ Favorable: Lower material costs than expected.
❌ Unfavorable: Higher material costs than expected.

b) Direct Labor Variance

Evaluates labor cost efficiency.

✅ Favorable: Less labor cost per unit.
❌ Unfavorable: Higher labor cost per unit.

c) Overhead Variance

Compares actual vs. budgeted overhead costs.

✅ Favorable: Lower overhead costs.
❌ Unfavorable: Higher overhead costs.

3️⃣ Performance Measurement and Action Steps

🔹 Steps to Analyze Variances:

1. Identify the variance (positive or negative).
   
   

2. Determine the cause (pricing issues, efficiency problems, demand changes).
   
   

3. Take corrective action (adjust pricing, improve efficiency, renegotiate contracts).
   
   

4. Monitor ongoing performance to prevent future variances.
   
   

🔹 Performance Metrics Used in Variance Analysis

✔️ Return on Investment (ROI): Measures profitability of an investment.
✔️ Gross Profit Margin: Assesses efficiency in cost management.
✔️ Contribution Margin: Helps evaluate product profitability.

4️⃣ Final Thoughts

✅ Variance analysis helps businesses stay on track with their budgets and improve profitability.
✅ Regular monitoring ensures financial stability and operational efficiency.
✅ Combining variance analysis with performance measurement leads to better decision-making.