The main aim of the standard costing is the control of the cost. So the management is provided with the information about situations where in the actual results are not as they were planned to be. Hence management is informed of only the deviations or variances from the original plans, their favourable or unfavorable nature and the causes of such deviations. In this context standard costing subscribes to the principles of “management by exception”.
Variance is the difference between standard cost and actual cost. It is expressed by a simple formula as follows:
Variance = actual cost – standard cost.
Variance analysis is therefore the process of analysis variance by dividing the total variance in such a way that management can assign responsibility for off standard performance. If variance is to increase the profit it is said to be favourable shown as (F). It would result when the actual cost are lower than the standard costs. It is also known as positive or credit variance and viewed only as savings. If variance is not to increase the profit it is adverse or unfavorable shown as (A) it would result when actual costs exceed the standard costs. It is also known as negative or debit variance and viewed as additional costs or losses.