Financial Glossary
Cost Variance
Cost variance is the difference between the cost a business expected to incur (its budgeted or standard cost) and the cost it actually incurred for a given activity, product, or period. It is typically calculated as budgeted cost minus actual cost, where a favorable variance means actual spending came in below plan and an unfavorable variance means it exceeded plan. Managers often break total cost variance into components such as price (rate) variance and quantity (efficiency) variance to pinpoint the underlying driver.
Problem & Application
For an owner-operated business or hospitality operator, cost variance turns a vague sense that margins slipped into a specific, actionable number. A campground that budgeted a set amount for cleaning supplies or seasonal labor and then ran over can use cost variance to separate a price increase from simply using more than planned. Reviewing variances each month lets operators catch creeping overhead, renegotiate with vendors, or adjust staffing before the gap compounds across a season.
In Short
Tracking cost variance regularly gives owners an early warning system for spending that drifts away from plan, so corrective action happens while it still matters. The most useful insight usually comes from splitting the total variance into price and quantity effects.