Have You Ever Finished a Variance Report… But Didn’t Know What to Do With It? 🤔
Many accountants stop at calculating the difference between standard and actual costs, but the real value of variances lies in understanding the cause and taking corrective action.

Cost variance analysis isn’t just about numbers—it’s about interpreting them and linking them to decisions that boost profitability and reduce waste.

In This Article You’ll Learn:

• What variances are and why formulas alone aren’t enough.

• How to analyze direct material and labor variances.

• Practical steps to turn numbers into corrective decisions.

• Real-world examples from the Saudi market.

What Are Cost Variances?

Core Concept
A variance is the difference between the standard (planned) cost and the actual cost.
Example: Standard = 100 SAR, Actual = 120 SAR → Variance = +20 SAR (unfavorable).

Why Calculation Alone Isn’t Enough
The number shows the gap—but not the cause or the solution.

Role in Control and Decision-Making

• Early warning tool for production or supply issues.

• Helps assign responsibilities clearly.

• Supports strategic decisions in pricing and production.

Direct Material Variance Analysis

Price Variance
Explanation: Caused by buying materials at higher/lower prices than standard.
Example: Standard = 10 SAR/unit, Actual = 12 SAR → Unfavorable variance = 2 SAR.
Action: Negotiate with suppliers or find alternatives.

Quantity Variance
Explanation: Caused by waste or efficiency in material usage.
Example: Standard = 5 kg/product, Actual = 6 kg → Unfavorable variance = 1 kg.
Action: Improve processes or train workers.

Direct Labor Variance Analysis

Rate Variance
Occurs when paying wages higher/lower than expected.
Example: Standard = 50 SAR/hour, Actual = 60 SAR → Unfavorable = 10 SAR.

Efficiency Variance
Occurs when actual labor hours differ from standard.
Example: Standard = 2 hours/unit, Actual = 3 hours → Unfavorable = 1 hour.

Actions

• Train employees.

• Reschedule tasks.

• Improve work allocation.

Overhead Variances (Indirect Costs)

Fixed vs. Variable

• Fixed: e.g., factory rent.

• Variable: e.g., electricity, energy tied to machine hours.

Saudi Examples

• Plastic factory: Higher electricity bill → revealed poor control of machine usage.

• Workshop: Unplanned maintenance increased overhead costs.

Value
Shows the effectiveness of planning against indirect costs.

Practical Steps for Smart Variance Analysis

1. Calculate Variances
   Using basic formulas:

• Price Variance = (Actual Price – Standard Price) × Actual Quantity.

• Quantity Variance = (Actual Quantity – Standard Quantity) × Standard Price.

2. Identify the Cause
   Was it price? Quantity? Efficiency?

3. Assign Responsibility
   Supplier? Management? Employees?

4. Take Corrective Action
   Negotiate contracts, train staff, improve operations.

Real Saudi Market Examples

Food Manufacturer
Excess raw material usage → after training, reduced waste and saved SAR 500,000 in one year.

Service Company
High labor variances → revealed inefficiency → solution: redistributing working hours.

Plastic Factory
High electricity bills → analysis showed idle production lines running → adjusting schedules reduced costs.

Common Mistakes in Variance Analysis

• Stopping at calculation without interpretation.

• Looking for blame instead of solutions.

• Ignoring external factors like market prices or government changes.

Why Variance Analysis Boosts Profitability

• Operational efficiency: Pinpoint where waste happens.

• Hidden cost reduction: Address overlooked losses.

• Strategic decisions: Strengthen pricing, contracts, and resource management.

Now you know variances are not just numbers—they’re signals that uncover opportunities to improve efficiency and profitability.

That’s where BTI’s Advanced Cost Accounting Program comes in:

• Real variance case studies from Saudi companies.

• Clear performance report preparation for management.

• Corrective decisions based on accurate data.

✅ Key Takeaway: Variances aren’t just figures—they are insights that reveal improvement opportunities and drive profitability.

💡 Motivational Note: Outstanding accountants don’t just read numbers—they interpret variances and turn them into practical wins.

FAQ

Q1: Does every unfavorable variance mean a problem?
Not always—sometimes higher costs mean better quality or faster production.

Q2: Can variances be useful in service companies?
Yes, especially in wages, employee efficiency, and work hours.

Q3: How should I present variance reports to management?
With tables and visuals showing the cause and recommendation—not just raw numbers.