Thus, it frequently makes sense to divide cost variance analysis into price and volume variances, thereby gaining better insights into the costs incurred. Only the remaining $5,000 of the unfavorable variance was due to unusually high prices, which could then be investigated in detail. This was hardly indicative of poor performance, since it implied that the company was selling more units. A detailed cost variance analysis reveals that the company sold several hundred more units than it expected, and the cost of those additional units comprised $35,000 of the variance. That portion of the variance caused by any change in the volume of goods or services ordered.Ī company has an unfavorable variance in its cost of goods sold of $40,000. That portion of the variance caused by a difference between the actual and expected price of the goods or services acquired. A more refined approach is to split this difference into two elements, which are: The most simple form of cost variance analysis is to subtract the budgeted or standard cost from the actual incurred cost, and reporting on the reasons for the difference. Take corrective action to bring the incurred cost into closer alignment with the expected cost Investigate the reasons for the difference It is comprised of the following steps:Ĭalculate the difference between an incurred cost and an expected cost

Cost variance analysis is a control system that is designed to detect and correct variances from expected levels.

What does high cost variance mean