COST VARIANCE ANALYSIS

                                                                          FAQ

Cost variance analysis is a control process or better call system designed to identify and correct variances from expected goals.

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It is comprised of the following steps:​

• Identified and calculate the difference between budget, forecast vs actuals costa

• Investigate the reasons for the variances

• Build management reports to inform executives

• Provide solutions and take corrective action to bring the incurred cost into closer alignment with the expected cost​

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The most used form of cost variance analysis is to subtract the budgeted/forecast or planned cost from the actual incurred costs, and reporting on the reasons for the difference. Cost variance analysis is a unique process for every organization and requires customization for every client.

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KCReliance team offers variance analysis:

• Purchase price variance. The actual price paid for materials used in the production process, minus the standard cost, multiplied by the number of units used.​

• Variable overhead spending variance. Subtract the standard variable overhead cost per unit from the actual cost incurred and multiply the remainder by the total unit quantity of output.

• Fixed overhead spending variance. The total amount by which fixed overhead costs exceed their total standard cost for the reporting period.

• Selling price variance. The actual selling price, minus the standard selling price, multiplied by the number of units sold.

• Variable overhead efficiency variance. Subtract the budgeted units of activity on which the variable overhead is charged from the actual units of activity, multiplied by the standard variable overhead cost per unit.​

• Price variance. That portion of the variance caused by a difference between the actual and expected price of the goods or services acquired.​

• Volume variance. That portion of the variance caused by any change in the volume of goods or services ordered.

Cost analysis is the central activity of budgeting and forecasting process; it requires skilled financial analysts involved in all aspects of operation to evaluate if a business if following planned goals. Cost analysis could be also an indicator of the decision making process and direct organizational funding to more profitable projects instead of one with profitability issues.

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Cost analysis should be a constant process of controlling and directing the use of funds and resources and it could require more complex approaches:​

• Building a competitive analysis in the between Marginal analysis focusing on operational cost

• Marginal Analysis focuses on SG&A

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