This section describes how labour, material and overhead variances are calculated and what causes every of those variances. A chart is given also to describe how the variances add up to translate to a profit variance.
In a typical organization, the planning process starts along with a budget followed with actual performance. The budget will generally be based on standard costs of the needed output units. Although how does a budget real performance relate?
1. Budgets are followed with performance
2. Performance leads to preparation of a performance report that compares the budgeted performance and the real performance, and consequently determines whether is a favourable (F) or whether unfavourable (U) variance. These variances are exceptions; hence the performance report variance report is an exceptions report.
3. Variance signals those areas such require managerial attention and these are common areas along with problems. These variances lead to investigation in those problems areas and the suitable corrective action is recommended, determined and later on implemented.