Standard Costing and Variance Analysis

Every business has its own unique financial goals and targets. Some reach their targets with pinpoint precision, while others perform far better or worse than expected. Standard costing and variance analysis is the process by which the causes of variations between expected performance and actual performance are investigated and analysed. It can apply to both income and expenses alike – anywhere deviations from established financial performance standards exist. If expected income over a set period of time was set at £250,000, actual income of £190,000 warrants immediate investigation. Only this way can the cause be established and measures implemented, in order to prevent future deviations from occurring.

This tutorial explores variance analysis accounting as one of the most important financial management tasks for any organization. Along with direct issues involving income and expenses, the concept of inaccurate forecasting is also discussed. The content covers several key considerations, including direct material and labour variances, sales variances and how to accurately report and control variance where detected.