Companies may perform variance analysis of direct materials, direct labor, and overhead.

a. A variance is defined as the difference between total actual costs and total standard costs allowed for actual production.

b. Variances may be divided into a price (rate) component and a quantity (efficiency) component.

c. Variances are defined as favorable if actual prices or quantities used are less than standard prices or quantities. However, because variances often are interrelated, favorable variances are not always good.