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The difference between the standard cost and the actual cost is known as ‘cost variance’.

The difference between the standard cost and the actual cost is known as ‘cost variance’. If actual cost is less than the standard cost, the variance is favorable. If the actual cost is more than the standard cost, the variance is unfavorable. A favorable variance indicates efficiency, while an unfavorable one denotes inefficiency. However, mere knowledge of these variances would not be useful for ensuring cost control. These have to be thoroughly analyzed so as to find out the contributory factors. It would then be possible to find out whether the variances are amenable to control or not. The term ‘variance analysis’, thus, may be defined as ‘the resolution into constituent parts and the explanation of variances’.

Variances are of two types: cost variances and sales variances. In this lesson cost variances relating to material and labour are explained.

Tags : Accounting For Managers - Cost Estimation And Control-Standard Costing And Variance Analysis

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