After a project, the procurement team at CLK Ltd meets up and summarises on the performance. They see that they actually spent $5,000 less than…

The procurement team in the scenario is analysing the difference between the plan and actual

spend. This activity is known as variance analysis. The sum of all variances gives a picture of the

overall over-performance or under-performance for a particular reporting period. For each item,

companies assess their favorability by comparing actual costs to standard costs in the industry.

For example, if the actual cost is lower than the standard cost for raw materials, assuming the same

volume of materials, it would lead to a favorable price variance (i.e., cost savings). However, if the

standard quantity was 10,000 pieces of material and 15,000 pieces were required in production, this

would be an unfavorable quantity variance because more materials were used than anticipated.

Reference:

- CIPS study guide page 57-58

- Variance Analysis - Learn How to Calculate and Analyze Variances (corporatefinanceinsti-tute.com)

LO 1, AC 1.4