What is a cost variance analysis and how is it used in operations management?

• A. Compare sales to marketing plan
• B. Compare actual costs to standard costs, identify variances, investigate causes, and implement corrective actions
• C. Forecast demand
• D. Compare vendor prices

Answer: (B)

Cost variance analysis is the process of comparing what actually happened with what was planned in terms of costs. In operations management you set standard costs for materials, labor, and overhead, then you compute the variance by subtracting the standard cost from the actual cost. This reveals where spending deviates from the plan.

When a variance is found, you investigate its causes—price changes in materials, waste or scrap, inefficiency in labor, or misallocated overhead. Based on those findings, you take corrective actions such as negotiating better prices, tightening inventory use, improving work methods, or updating your standards and budgets to reflect reality. The goal is to control costs, improve budgeting accuracy, and support ongoing process improvements.

A favorable variance means you spent less than planned, while an unfavorable variance signals spending more than planned and needing attention. Related activities like forecasting demand or simply comparing vendor prices aren’t the full mechanism of cost variance analysis, which specifically ties actual costs to standard costs, identifies variances, and drives corrective actions.