Variance analysis involves comparing actual costs to standard costs and identifying the reasons for deviations. It helps in understanding the factors contributing to cost differences and taking appropriate actions. The two primary types of variances in standard costing are materials variances and labor variances.

1. Materials Variances: a. Materials Price Variance: It measures the difference between the standard cost of materials and the actual cost incurred due to variations in material prices or purchasing decisions. b. Materials Quantity Variance: It reflects the difference between the standard quantity of materials specified for production and the actual quantity used, considering issues like material wastage, scrap, or efficiency in material usage. c. Materials Mix Variance: This variance arises when there is a deviation from the standard mix of materials used in the production process.

2. Labor Variances: a. Labor Rate Variance: It measures the difference between the standard labor rate and the actual rate paid for labor, considering factors like wage rates, employee skill levels, or changes in employment contracts. b. Labor Efficiency Variance: This variance captures the difference between the standard labor hours allowed for production and the actual hours worked, reflecting factors such as productivity, training levels, or machine breakdowns.

Analyzing these variances helps management understand the reasons for cost deviations and take appropriate actions. For example, if a materials price variance is unfavorable, management may consider negotiating better prices with suppliers or seeking alternative sourcing options. If a labor efficiency variance is adverse, steps can be taken to improve productivity or provide additional training to employees.

Standard costing and variance analysis enable businesses to monitor and control costs, identify areas of improvement, and make informed decisions to enhance efficiency and profitability.