The planning and operational variance approach attempts to divide a total variance into a group of variances which have arisen because of inaccurate planning or faulty standards (planning variances) and a group of variances which have been caused by adverse or favourable operational performance (operational variances).
A planning variance compares an original standard with a revised standard that should or would have been used if planners had known in advance what was going to happen. Planning variances are uncontrollable (see below) by operational managers, but can be avoided through better planning.
An operational variance compares an actual result with the revised standard. Operational variances are controllable by managers.
Planning and operational variances are based on the principle that variances ought to be reported by taking as the main starting point a standard which can be seen, in hindsight, to be the optimum that should have been achievable. For example, in the example given in the question, the standard direct labour rate should have been $12.48 rather than $12.00.
Exponents of this approach argue that the monetary value of variances ought to be a realistic reflection of what the causes of the variances have cost the organisation. In other words they should show the cash (and profit) gained or lost as a consequence of operating results being different to what should have been achieved. Variances can be valued in this way by comparing actual results with a realistic standard or budget.
Planning variances arise because the original standard and revised (more realistic) standards are different, and these have nothing to do with operational performance. In most cases, it is unlikely that anything could be done about planning variances: they are not controllable by operational managers but by senior management.
Problems
The reasons behind why planning variances arise may need to be investigated. It needs to be understood how certain pieces of information get missed or otherwise omitted from the standard setting process.
It can also be too easy to justify all the variances are being due to bad planning, so no operational variances will be highlighted.
It is difficult to decide in hindsight what the realistic standard should have been, and establishing retrospective standards is time consuming.
