Which is the first step in cost variance analysis?

• A. Prepare reports
• B. Analyze variances
• C. Questions and answers
• D. Take action

Answer: (A)

Cost variance analysis starts with compiling a variance report that shows actual costs versus the standard costs for materials, labor, and overhead. This report provides a clear, organized view of where costs deviated from expectations, so management can see the scope of variances and communicate them to others. Once the variances are prepared in a report, the next step is to analyze them to identify root causes and determine whether deviations are due to efficiency, price changes, or usage. After analysis, actions are taken to address the causes and improve future performance. Other choices don’t fit because taking action or jumping straight to questions and answers would come after you have identified and understood the variances; having a prepared report is the necessary first step to enable that sequence.