Accounting All-in-One For Dummies (+ Videos and Quizzes Online), 3rd Edition

Chapter 4

Accounting for Change with Variance Analysis

IN THIS CHAPTER

Understanding and setting standard costs

Using formulas and shortcuts to compute variances

Identifying variances that require further investigation

The only certainty is that the future is uncertain. No matter how much experience a person has, or how much information about past trends and current factors is available, at best we are making educated guesses. Being able to measure how confident we are in our estimates and identify the reasons that reality varied from expectations are a vital tool for financial planning and control.

Variance analysis plays a similar role for business. When things go wrong, or even when they go more right than expected, variance analysis explains why. What caused higher-than-expected profits? What about unexpected losses? You can use all this information to improve future operations.

In this chapter we'll set up the basics of what makes things so variable and uncertain. We'll also discuss the foundations of how we can use accounting formulas to help businesses plan for an uncertain world.

Setting Up Standard Costs

You can’t measure variances without first setting standard costs ...