A variance represents the difference between the budget and the actual performance. If the variance reveals a poorer performance than planned, it is known as an adverse variance, e.g. higher costs or lower sales revenue. If the variance shows a better performance than planned, it is knows as a favourable variance, e.g. lower costs or higher sales revenue.
For an adverse variance, providing the factor that caused it is under the businesses control, alternaitive methods can be investigated. Favourable variances can be used to identify efficient methods that can be adopted more widely in the company.
Variance in costs can be cause by changes in:
- Material costs (cheaper or dearer)
- Efficiency changes
- Morale and efficiency of staff
- Wages
- Quality of material
- Storage and wastage of materials
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