Financial Times Essential Guide to Budgeting and Forecasting, The

8

Making sense of standard costing and variances

You may be using a standard costing system and initially this can be confusing. How can you make sense of variances and manage them effectively?

Making sense of variances

Variance analysis is the process of reviewing and explaining the differences between the original budget and actual performance. One might believe that the original budget is always the ‘right’ answer, but this is a figure that may have been derived 18 months earlier and is now out of date. By making reference to the original assumptions in the budget it may be possible to explain and manage performance better. Variance analysis should not be about assigning blame but about understanding reasons.

One technique that can be ...