Difference between revisions of "Variance"

Revision as of 13:34, January 24, 2010

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-'''Variance''' is a term frequently used in Management or [[Cost]] [[Accounting]].
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-It is used to highlight the differences between standard costs and actual costs.  The variance may be highlighted in units or in [[dollars]].  For example, the standard cost of a product may be 2.5 [[labor]] hours, but if the actual time spent was three hours, the product would be said to have an unfavorable variance of 0.5 hours.  If the labor rate was $20.00 per hour, the labor variance would be $10.00
-Now, suppose the actual labor rate was $25.00 per hour, there would be a labor rate variance of ($25.00-$20.00) x 2 hours or $10.00.
-We now have a labor variance of $10.00 and a rate variance of $10.00 also.  In addition we have a $5.00 unfavorable variance that is a mixture of rate and time.
-Analysis of variances assists management in determing the cause of the cost overrun.  The extra hours point could point to a problem in efficiency whereas the rate variance may indicate that lower cost workers could be used to assemble the product.
-[[Category:Accounting]]
-[[Category:Business]]