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10.13: Introduction to Variance Basics

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    What you’ll learn to do: Discuss the basic principles of cost variance analysis

    In our last unit, we started to discuss the flexible budget variances. This process helps us to understand how well our company performed, based on budgeted numbers. When we look at revenue or spending variances, or how different our actual revenue and costs were from our budgeted, we can then start to analyze how well revenues and costs were controlled with that actual revenue and expense information.

    So in our Simply Yoga example, when utilities went up with the additional class offerings, it may be that we were not effectively scheduling classes, or it may be that students want those options. In either case, we will need to look at how costs are affected by the various cost drivers, and how to best minimize these variances to run the business profitably.

    In our Hupana Running Company budget, we set benchmarks and goals based on historical data. We will be using their budget to do cost variance analysis on materials, labor and variable manufacturing overhead.

    We will discuss standards, which are our benchmarks for measuring performance. We will also look at the steps needed to effectively calculate our variances and use the information to improve company performance.

    Let’s get started with the four steps to simple cost variance!

    CC licensed content, Original
    • Introduction to Variance Basics. Authored by: Freedom Learning Group. Provided by: Lumen Learning. License: CC BY: Attribution

    10.13: Introduction to Variance Basics is shared under a not declared license and was authored, remixed, and/or curated by LibreTexts.

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