Teaching Variance Analysis for Cost Accounting: How to Achieve above Par Performance

Abstract Purpose The tool described is most appropriate for a first-level undergraduate course in cost/management accounting, which is typically taken in the second year of a post-secondary business program. Methodology/approach This chapter discusses a method for teaching a challenging topic within cost/management accounting, which is calculating variances for expenses. The proposed methodology focuses on a “common sense” understanding of variances as differences between budgeted and actual results. The new approach (i) uses a golfing analogy as a frame of reference, (ii) includes questions to assist in the analysis, and (iii) provides a table to organize and calculate variances. The variances examined include eight common expense-side variances used by manufacturers: material price and efficiency variances; labor price and efficiency variances; variable overhead spending and efficiency variances and fixed overhead spending and production volume variances. Findings By using this tool, students will be able to understand how and why variances are calculated. It will also provide them with better insight into appropriate corrective action that will address deviation from plans. Originality/value I provide a template to facilitate the calculation of variances, along with a list of questions that will guide students in their analysis. I also give an application of the suggested approach, using a standard textbook problem.