How it is done
Variance = actual - comparison (budget, forecast, last month or last year).
For revenue, a positive variance is favourable. For an expense, a positive variance is unfavourable, because more was spent. A typical routine:
- Calculate the dollar and percentage variance for every line.
- Keep only lines over your materiality threshold.
- Find the cause: volume, price, timing, a one-off or an error.
- Write one or two plain sentences on what happened and what to expect next.
Worked example
| Line | Budget | Actual | Variance | |
|---|---|---|---|---|
| Revenue | $120,000 | $126,000 | +$6,000 (+5.0%) | Favourable |
| Materials | $48,000 | $54,000 | +$6,000 (+12.5%) | Unfavourable |
Sales were 5% over budget, so materials should be about 5% over too: $48,000 × 1.05 = $50,400. That explains $2,400 as volume. The other $3,600 is price or waste, and invoices show a supplier price increase. $2,400 + $3,600 = $6,000, the full variance.
Common mistakes
- Restating the number as the reason. "Materials were up because we spent more on materials" explains nothing.
- Mixing timing with permanent changes. A bill that arrived early will reverse next month. A price increase will not.
- Sign confusion. Say favourable or unfavourable in words, so a minus sign can't be misread.
- Investigating every line. Use a threshold, and spend the time on the lines that matter.
Related terms
- Materiality threshold: A materiality threshold is the size of change, or error, that is big enough to matter to the people reading the numbers.
- Forecast vs actual: Forecast vs actual is the comparison of what a forecast said would happen with what actually happened over the same period, line by line.
- Gross margin: Gross margin is revenue minus the cost of goods sold (COGS), shown as a percentage of revenue.