What is a Variance?

A variance is the difference between an actual measured result and a basis, such as a budgeted amount. In many accounting applications, a variance is considered to be the difference between an actual cost and a standard cost. There are a multitude of possible variances that can be reported to management, so the person reporting this information should be selective in only forwarding those variances that management can take action to correct. If a variance is insignificant or cannot be corrected in the future, there is less reason to present the information.

How is a Variance Used?

Variance reporting is used to maintain a tight level of control over a business. For example, the sales manager might want to review the variance between projected sales and actual sales for a sales region, in order to adjust the sales effort within the region. Or, the production manager might want to review the overtime variance, to see if an excessive amount of overtime is being used on the production line. Similarly, the marketing manager might want to see any expenditure variances relating to certain marketing campaigns.

How Can a Variance be Manipulated?

The amount of a variance can be manipulated by adjusting the baseline upon which it is calculated. For example, if the purchasing manager wants to generate a favorable materials purchase price variance, he or she can lobby for a high baseline cost. With the standard so high, it is an easy matter to actually purchase at a lower price point, resulting in favorable performance under the variance calculation. For this reason, the formulation of variances should be carefully controlled.