What is the purpose of variance analysis in standard costing?

• A. To identify deviations between actual and standard costs, control costs, and improve performance.
• B. To forecast future sales using price-earnings ratios.
• C. To calculate taxes payable.
• D. To prepare cash flow statements.

Answer: (A)

Variance analysis in standard costing is about comparing what was actually spent to what was expected to be spent. By using standard costs for materials, labor, and overhead, managers can quickly see deviations and understand their impact on overall cost. The main value is cost control and performance improvement: when actual costs exceed standards, unfavorable variances point to price changes, inefficient use of materials or time, or overhead problems; when actual costs are below standards, favorable variances suggest efficiencies or underutilization of resources. This information guides corrective actions, such as negotiating better prices, changing processes to boost productivity, or updating standards to reflect realistic conditions. In short, variance analysis helps pinpoint where costs are drifting and what to do to bring performance back in line with plan. It’s not about forecasting sales, calculating taxes, or preparing cash flow statements, which are separate tasks.