What is cost variance analysis?

Cost variance analysis is a technique used to compare actual costs incurred by an organization with budgeted or standard costs to identify differences or variances and analyze the reasons behind them. Variances can arise due to various factors, such as changes in input prices, production volumes, efficiency levels, or the implementation of cost-saving initiatives. Cost variance analysis involves calculating and interpreting different types of variances, such as material variances, labor variances, overhead variances, and total cost variances. Positive variances indicate that actual costs are lower than budgeted or standard costs, while negative variances indicate that actual costs exceed budgeted or standard costs. By analyzing cost variances, management can identify areas of cost overruns, inefficiencies, or cost-saving opportunities and take corrective actions to address them. Cost variance analysis is a valuable tool for performance evaluation, cost control, and continuous improvement within an organization.