# The cost variance formula

A cost variance is the difference between an actual expenditure and the expected (or budgeted) expenditure. A cost variance can relate to virtually any kind of expense, ranging from elements of the cost of goods sold to selling or administrative expenses. This variance is most useful as a monitoring tool when a business is attempting to spend in accordance with the amounts stated in its budget.

The cost variance formula is usually comprised of two elements, which are:

• Volume variance. This is the difference in the actual versus expected unit volume of whatever is being measured, multiplied by the standard price per unit.
• Price variance. This is the difference between the actual versus expected price of whatever is being measured, multiplied by the standard number of units.

When you combine the volume variance and the price variance, the combined variance represents the total cost variance for whatever the expenditure may be.

The volume and price variances have different names, depending upon the type of expenditure being examined. For example, the volume and price variances for direct materials are:

• Material yield variance
• Purchase price variance

Or, the volume and price variances for direct labor are:

• Labor efficiency variance
• Labor rate variance

Or, the volume and price variances for overhead are: