8.9 ANALYSIS OF VARIANCE ‘The deviation of actual performance from the standard set out is called ‘variance! As per the official terminology ‘of CIMA, London, variance is ‘the difference between plarmed, budgeted or Standard Cost and Actual Cast: Vari- ance Analysisis the process of analysing the reasons behind the variances occurred by sub-ividing them in such ‘a manner so that the management can be reported for adopting remedial measures for any off-standard perfor- ‘mance. According to CIMA, London, Variance Analysis is the process of computing the amount of variance and isolating the cause of variance between actual and standard’ Therefore, Variance Analysis isa process of calculat- ing the total variance by comparing the actual performance with the standard set out and all its sub-variances that may be practised for identifying the causes for such variance and reporting to the management for taking the corrective action for any off-standard performance of the manufacturing function. Hence, Variance Analy- sis involves three functional actions: (i) Ascertainment of individual variances; (ii) Determination of causes of variance; and (ii) Reporting to the management for taking corrective action for any off-standard performance. 8.9.1 Direction of Variances In case of cost variances, the excess of Standard Cost over the actual cost represents the positive or favourable variance, which indicates that the actual cost is less than the Standard Cost. On the other hand, the excess of actual cost over the Standard Cost represents the negative or unfavourable or adverse variance, which indi- ‘cates that the actual cast is more than the Standard Cost. In case of sales variances, the excess of actual sales ver budgeted sales represents the positive or favourable variance, which indicates thatthe actual sales is more than the budgeted sales. On the other hand, the excess of budgeted sales over the actual sales represents the negative or unfavourable or adverse variance, which indicates that actual sales is lesser than the budgeted sales. 8.9.2 Nature of Variances "Nature of variances may be of two types: (a) Controllable Variances; and (ii) Uncontrollable Variances. ‘Controllable variances are those which arise due to controllable causes, that is, which can be controlled by taking an appropriate corrective action, for example, use of defective or inferior quality of materials, engage- ‘ment of inefficient workers and so on. ‘Uncontrollable variances are those which arise due to uncontrollable causes, that is, on which control ‘can be exercised, for example, change in the market price of materials, change in the market rate of labour and soon, 8.9.3 Purposes of Variance Analysis Variance Analysis serves the following purposes: i. To assess the overall, departmental and individual efficiency of the concern. ii, Toactas an instrument of cost control and cost reduction. Ail, To enable the management to utilize men, materlals and machines effectively. iv. To provide the basis for framing future plans of action and formulating managerial policies. 8.10 CLASSIFICATION OF VARIANCES Broadly, variances are classified into two parts—Cost Variances and Sales Variances. Again, cost variances are classified into four parts for each of the cost element, such as Material Cost Variances, Labour Cost Variances, Variable Overhead Variances and Fixed Overhead Variances, Classification of variances is explained in a chart format in Figure 8.1. Variance I ‘Com Variance Giles Voriance Rewtle) [ieee Variable Fixed Overbead | [Sales Value Sales Margin Variance} [ariance} | overhead Variance Variance Variance Variance