Business – 5.4 Costs – Uses of cost information | e-Consult
5.4 Costs – Uses of cost information (1 questions)
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Variance analysis compares actual costs with standard (budgeted) costs to highlight areas where performance deviates from expectations. The key steps are:
- Set realistic standards for each cost element (e.g., material, labour, overhead).
- Record the actual costs incurred during the period.
- Calculate the variance: Variance = Actual Cost – Standard Cost.
- Classify each variance as favourable (costs lower than expected) or unfavourable (costs higher than expected).
- Investigate the reasons for significant variances (e.g., price changes, inefficiencies, waste).
- Take corrective action or adjust standards where appropriate.
Through this process managers obtain:
- Early warning of cost overruns.
- Insight into operational inefficiencies.
- Quantitative data to support performance appraisal and budgeting revisions.