Variance Analysis
Aussi : Budget vs Actual Analysis, BvA, Budget Variance Analysis
Variance analysis compares actual financial results against budgeted or planned figures to quantify differences and explain why they occurred.
What It Is
Variance analysis is the process of comparing actual financial or operational results to a baseline (typically a budget, forecast, or prior period) and explaining the differences. Each difference is called a variance. A variance is favorable when it improves profit (higher revenue or lower cost than planned) and unfavorable when it hurts profit.
The core formula is simple:
- Variance = Actual, Budget (for revenue, a positive result is favorable)
- For costs, a positive result (actual above budget) is unfavorable.
Why it matters
Variance analysis turns raw numbers into management insight. A single number ("we missed budget by $200K") says little. Decomposing it reveals the drivers: Was it lower volume, weaker pricing, higher input costs, or unexpected spending? This lets leaders take targeted corrective action, hold owners accountable, and improve future forecasts.
For a CFO, variance analysis is central to the monthly close, board reporting, and the budget-versus-actual conversation with department heads.
How it is used in practice
Common breakdowns include:
- Price variance: the effect of paying or charging a different price than planned.
- Volume (quantity) variance: the effect of selling or using a different quantity.
- Mix variance: the effect of a different blend of products or channels.
- Efficiency variance: the effect of using more or fewer resources per unit.
A disciplined process sets a materiality threshold (for example, investigate any variance over 5 percent or $50K), assigns each significant variance an owner, and documents the root cause in a commentary section of the management report.
Concrete Example
A company budgeted revenue of $1,000,000 (10,000 units at $100). Actual revenue was $1,045,000 (9,500 units at $110).
- Price variance: (110, 100) x 9,500 = +$95,000 favorable.
- Volume variance: (9,500, 10,000) x 100 = -$50,000 unfavorable.
- Net revenue variance: +$45,000 favorable.
The headline beat hides a real problem: unit volume fell 5 percent, masked by stronger pricing. Variance analysis surfaces that tension so the team can ask whether higher prices are suppressing demand.