Analyzing and reporting

financial performance-
Analysis of variances
MCS
 Standard Costing
• Standard costing is a technique which uses standards for
costs and revenues for the purpose of control through
variance analysis.
• Standard is a pre-determined measurable quantity set in
defined conditions against which actual performance can
be compared, usually for an element of work, operation
or activity.
• Standard cost is a predetermined calculation of how much
costs should be under specified conditions.
• Standard Price-It is a predetermined price fixed on the basis
of specification of a product or service and of all factors
affecting the price.
• Standard selling price per unit: it is a predetermined price
for a product or service for a specified unit to be sold. A
unit may consist of a single item or a batch of processed
output.
• Standard operating profit-unit- It is the predetermined profit
from the sale of a product or service at the standard
 Variance Analysis

• ‘Variance’ is the difference between planned,

budgeted or standard cost and actual costs and
similarly in respect of revenues.
• This should not be confused with the statistical
variance which measures the dispersion of
statistical population.
• ‘Variance Analysis’ is the analysis of variances
arising in a standard costing system in to their
constituent parts. It is analysis and comparison of
the factors which have caused the difference
between pre-determined standards and actual
results, with a view to eliminating inefficiencies.
• Variance analysis highlights areas of strengths and
weaknesses, but does not indicate what action, if
any, should be taken.
• Variances can be classified as under:
• Material , Labor, Variable overhead, Fixed overhead,
Sales and Profit variances.
 Types of Financial Performance Variance
• Cost/Expenditure Variance
• Fixed Cost Variance
• Variable Cost Variance
• Revenue variance
• Sales Price variance
• Sales Volume Variance – Sales Mix Variance
 - Sales Quantity variance –
Market Share Variance
 -
Market Size Variance
 Revenue Variance
• Revenue Variance is the difference between the
actual and planned revenue of the
organization.
• This difference can occur due to the difference
between the actual and planned sales volume,
due to difference between the actual and
planned selling price or both.
• Sales variance can be calculated either through
the value method (sales value) or through the
profit method (profit margin).
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