Definition of Cost Variance
Generally a cost variance is the difference between the actual amount of a cost and its budgeted or planned amount. For example, if a company had actual repairs expense of $950 for May but the budgeted amount was $800, the company had a cost variance of $150. When the actual cost is more than the budgeted amount, the cost variance is said to be unfavorable. When an actual cost is less than the budgeted amount, the cost variance is said to be favorable.
Cost Variances in Standard Costing Systems
Cost variances are a key part of the standard costing system used by some manufacturers. In such a system, the cost variances direct attention to the difference between 1) the standard, predetermined and expected costs of the good output, and 2) the actual manufacturing costs incurred. These cost variances send a signal to management that the company is experiencing actual costs that are different from the company's plan.
Standard costing systems report a minimum of two cost variances for each of the following manufacturing costs:
- Direct materials
- Direct labor
- Manufacturing overhead