Computation of Variances

Introduction to Computation of Variances

After setting the standards and standard costs for several elements of cost, the next significant step is to calculate variances for each element of cost. Variance is the variation among the standard cost and the actual cost. In other words it is the variation among what the cost should have been and what the actual cost is. Element wise calculation of variances is provided in the subsequent paragraphs:

A] Material Variances:

 In the material variances, the major objective is to find out the variation among the standard cost of material employed for actual production and actual cost of material employed. So the main variance in this category is the cost variance that is thereafter broken down into other variances.

B] Labour Variances:

Such as the material variances, labour variances arise because of the difference among the standard labour cost for actual production and the actual labour cost.

C] Overhead Variances:

The overhead variances depict the variation among the standard overhead cost and the actual overhead cost. In case of direct labour variances and direct material, there is no question of dividing them into fixed and variable like the direct material and direct labour costs are variable. Though, in case of overheads, it is essential to split them into fixed and variable for calculation of variances.

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