ABSTRACT
This chapter contains variance analysis; the principles on which it is based; underlying assumptions; guidance on application, and relevant issues; and related models. Variance analysis is the analysis of differences between actual and planned performance. The differences between actual and planned performance can be explained by analysing variances. Managers tend to locate the cause of the largest or most significant variance first and to analyse only the most costly variances. Variances between the revised budget and actual results then become control variances which show whether managers have achieved optimum results following budget revision. If an effective standard costing system is in place, variances will be minimized, more easily investigated and correctly attributed to responsibility centres. Before investigating variances it is advisable to ensure that the cost of so doing is justified by the likely benefits/savings. Understanding the causes of variances enables the manager to recreate or avoid such variances in future and so improve performance.
