When the actual cost differs from the standard cost, it is called variance. If the actual cost is less than the standard cost or the actual profit is higher than the standard profit, it is called favorable variance. On the contrary, if the actual cost is higher than the standard cost or profit is low, then it is called adverse variance.
Each element of cost and sales requires variance analysis. Variance is classified as follows:
● Direct Material Variance
● Direct Labor Variance
● Overhead Variance
● Sales Variance