Why variances are calculated

What are Variance analyses

Concept variance analyses to compare the standard performance with the actual performance. The actual performance is better than expected /standard performance then it is called favorable situation and expressed as favorable variance and if the actual performance is worst than standard performance than it is called adverse situation and expressed as adverse variance.

Why variances are calculated

There are number of advantages of variances

1. Control Expenditure

When variance is calculated during the period it provides management to take appropriate action to control the expenditure.

2.  Adjust budget estimates

When there is no appropriate reason for adverse variance then it is assumed that budgeted estimate were in correct and appropriate correction is made in budget.

3. Evaluate performance

Variance is important tool to evaluate performance of individual and especially the controlling manager.