Cost Variance Analysis

What Is Cost Variance Analysis?

Cost variance analysis is the systematic process of comparing actual costs incurred to expected costs (budget, standard, or forecast) and analyzing the differences. Understanding why costs deviated from expectations helps organizations:

• Control expenses
• Improve forecasting accuracy
• Identify operational issues
• Make better decisions
• Hold departments accountable

Variance Formula

The basic variance calculation:

Variance = Actual Cost - Budgeted Cost

• Favorable variance (F): Actual < Budget (costs lower than expected)
• Unfavorable variance (U): Actual > Budget (costs higher than expected)

Types of Cost Variances

Price Variance

Difference due to paying more or less than expected per unit:

Price Variance = (Actual Price - Standard Price) × Actual Quantity

Example: Paid $12/unit instead of budgeted $10/unit for 1,000 units

• Price Variance = ($12 - $10) × 1,000 = $2,000 Unfavorable

Quantity/Usage Variance

Difference due to using more or less than expected:

Quantity Variance = (Actual Quantity - Standard Quantity) × Standard Price

Example: Used 1,100 units instead of budgeted 1,000 at $10/unit

• Quantity Variance = (1,100 - 1,000) × $10 = $1,000 Unfavorable

Efficiency Variance

Difference in labor or machine hours used:

Efficiency Variance = (Actual Hours - Standard Hours) × Standard Rate

Example: Project took 110 hours instead of budgeted 100 at $50/hour

• Efficiency Variance = (110 - 100) × $50 = $500 Unfavorable

Rate Variance

Difference in labor or overhead rates:

Rate Variance = (Actual Rate - Standard Rate) × Actual Hours

Example: Paid $55/hour instead of budgeted $50 for 110 hours

• Rate Variance = ($55 - $50) × 110 = $550 Unfavorable

Variance Analysis Process

1. Calculate Variances

Compute variances for each cost category:

• Materials (price, quantity)
• Labor (rate, efficiency)
• Overhead (spending, efficiency, volume)

2. Identify Significant Variances

Focus on variances that are:

• Large in absolute dollars
• Large as a percentage of budget
• Trending in a concerning direction
• Controllable by management

3. Investigate Root Causes

For significant variances, determine why:

• One-time event or ongoing issue?
• External factors (market prices) or internal (inefficiency)?
• Controllable or uncontrollable?
• Budget error or actual performance issue?

4. Take Corrective Action

Based on investigation:

• Adjust operations to improve performance
• Update budgets/standards if unrealistic
• Communicate issues to stakeholders
• Implement controls to prevent recurrence

5. Report and Follow Up

Document findings and track progress:

• Variance reports to management
• Action item tracking
• Trend analysis over time

Common Variance Explanations

Favorable Variances:

• Negotiated better supplier pricing
• Improved operational efficiency
• Lower-than-expected volumes
• Budget was overly conservative

Unfavorable Variances:

• Supplier price increases
• Inefficient processes
• Higher-than-expected volumes
• Waste or rework
• Budget was overly optimistic

Variance Analysis Best Practices

1. Analyze promptly: Investigate while issues are fresh
2. Look beyond the numbers: Understand the operational context
3. Consider interrelationships: One favorable variance may cause another unfavorable
4. Focus on controllable items: Prioritize variances management can influence
5. Update standards: Keep budgets realistic based on current conditions
6. Trend analysis: Single-period variances may be noise; patterns matter

How Go Fig Enables Variance Analysis

Go Fig automates and enhances variance analysis:

Automated calculation: Compute variances automatically as actual data arrives

Drill-down capability: Click on a variance to see contributing factors

AI-powered explanations: Celeste analyzes and explains variance drivers

Trend visualization: See variance patterns over time

Alert thresholds: Notify managers when variances exceed limits

Multi-dimensional analysis: Analyze by department, product, region, project