Describe Variance analysis.
Variance analysis involves the analysis of the differences between the actual cost and the
standard cost. It’s a budgetary yardstick for control and evaluation of achieved results and
performance. It can be carried out for both revenues and expenses. Variances are not recorded
anywhere in the books of account.
When closing a favorable variance, the cost of goods sold decreases. The cost of goods
sold decreases because a favorable variance means the profit increased and the costs incurred in
facilitating the sales decreased. For instance, if at the beginning we projected that the total sales
would be four (4m). But after twelve months the sales totaled to six million due to a decrease in
the sales expenses. The cost of goods sold decreased by two (2) million giving raise to the extra
two million in sales. The Gross margin increases when a favorable variance is closed to cost of
goods sold. The Gross margin is the total sales less cost of goods sold divided by the total sales.
The cost of goods sold still plays a big role in determination of the Gross margin just like in the
first question.
Variance analysis 2
When closing unfavorable variance the cost of Goods sold increases.(Gelman,2008) The
unfavorable variance means that the actual cost of the goods increased more than it had been
originally budgeted for in the standard budget. The gross margin decreases when there’s
unfavorable variance. Unfavorable variance means that the cost of goods sold increased leading
to losses and which reduced the profit margin.
When the achieved results are better than the standard expected results then the variance
is favorable Its described and denoted by letter F.When the achieved results are worse than the
standard expected results then the variance is unfavorable.
References
Gelman, A. (2008). “Variance, analysis of”. The new Palgrave dictionary of economics (2nd
Ed.). Basingstoke, Hampshire New York: Palgrave Macmillan. ISBN 9780333786765
