# Variance Analysis — Classification
## What is a Variance?
A variance is the difference between standard cost and actual cost (for costs), or between budgeted and actual results (for sales).
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## Classification 1: Controllable vs. Uncontrollable Variances
### Controllable Variances
- Can be prevented by timely action from a responsibility centre
- The responsibility centre is accountable for these variances
- Examples: Material wastage from careless handling, labour idle time from poor scheduling
### Uncontrollable Variances
- Arise due to factors outside the control of the responsibility centre
- Even with preventive measures, these cannot be avoided
- Examples: Market price increases for raw materials, government-mandated wage revisions
> Key Principle: Controllability is subjective — a variance uncontrollable at supervisor level may be controllable at senior management level.
> Action Rule: If significant uncontrollable variances persist, revise the standard — it is no longer realistic.
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## Classification 2: Favourable vs. Adverse Variances
| Type | Cost Variances | Sales Variances | Notation |
|---|---|---|---|
| Favourable (F) | Actual cost < Standard cost | Actual sales > Budgeted sales | F |
| Adverse (A) | Actual cost > Standard cost | Actual sales < Budgeted sales | A |
### Critical Insight: Favourable ≠ Always Good; Adverse ≠ Always Bad
- Favourable price variance from buying cheaper material may cause adverse usage variance (more wastage) — net effect could be adverse
- Adverse efficiency variance from hiring skilled workers may produce favourable yield — net effect could be favourable
- Always analyse root cause, not just the sign
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## Labour Efficiency Variance and Its Sub-Components
Labour Efficiency Variance (LEV) = Difference between actual hours worked and standard hours for actual output, valued at standard rate.
Causes: Worker skill levels, inappropriate team composition, production manager or foreman inefficiency.
LEV is sub-divided into:
### (a) Labour Mix Variance (Gang Variance)
- Arises when the actual mix of worker grades differs from the standard mix
- Example: Using more skilled workers than the standard proportion stipulates
- Formula: (Standard cost of standard mix − Standard cost of actual mix) for actual total hours
- Adverse if a more expensive mix than standard is used
### (b) Labour Yield Variance (Revised Efficiency Variance)
- Arises when actual output differs from expected output given the hours actually worked
- Captures the efficiency of the actual gang in producing output
- Formula: (Standard hours for actual output − Revised standard hours) × Standard rate
> Relationship: Labour Mix Variance + Labour Yield Variance = Labour Efficiency Variance