Finance Project Management
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A Beginner's Guide to Variance Reports
Brandon Pfaff
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A variance report is one of the most commonly used accounting tools. It is essentially the difference between the budgeted amount and the actual, expense or revenue.
A variance report highlights two separate values and the extent of difference between the two.
It is this variance, or the difference, that it seeks to throw light on (and eventually the triggers as well). Typically, the variance report can be created only when the actual numbers are available.
The variance can be depicted both in absolute terms as well as a percentage difference. That highlights the degree of difference and that is why it is a crucial component in many accounting practices. It brings to light an inaccurate assumption or triggers that result in the variance.
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The formula for variance report
The variance report is created for all types of budgets. Typically the report is created after calculating the variance as per a strict formula. This is because the Variance comprises a key component of asset allocation. The formula for Variance is:
In this case:
- σ2 is the actual variance
- χ stands for the specific data in question
- μ is the mean of multiple data points
- N is the total number of data calculated
In case you are calculating the Variance % as a component of the Budget-Variance % = [Variance /Budget] x100 The percentage is crucial as it gives you a sense of the relative difference, and, in many cases, highlights the triggers that led to the difference.
Insight into variance report
The whole concept of variance report is that of comparison. It helps in identifying the materiality of a specific budget in question. It may be surprising but the first variance report and analysis was used in ancient Egypt.
Cardinally, it is the bastion of management accountancy. This is the most important tool that managements the world over use to calibrate their company’s performance, by assessing profit and loss and paying attention to budgetary differences. Therefore, it is a tool used to enhance efficiency in a long-standing manner and sustainably over a period of time.
Bonus: Check out Finance instructor Ray Sheen's top 10 finance tips
Interpreting variance report results
The variance report is often seen as the primary tool for better controlling future costs and conditions in a meaningful way. They are the perfect representation of how independent numbers are related to one other in a bigger group.
In statistics parlance, the biggest advantage of this type of report is that it gives equal importance to all types of deviations in an analysis. Regardless of the direction of their deviation from the mean, you cannot achieve a sum zero with this kind of number reporting. As a result, you will never see a situation where you get the appearance of no deviation or variance.
That essentially means that even the smallest deviation is earmarked appropriately in the variance report results.
But that does create a small hiccup. The interpretation of the variance report is not as simple as you assumed. You need to have a proper understanding of this calculation method, the dynamics of the industry for which you are analyzing and the specific number.
Remember variance gives added weight to each of these data points and squaring them can skew the numbers in a complicated and confusing way. Most importantly, it will not serve the core purpose for which it is computed in a meaningful way.
Perhaps an example will drive home the point in a meaningful way. Let us assume that we are computing the variance report for Company X. The returns for:
- Year 1 is at 10%
- Year 2 is at 15%
- Year 3 is at -10%
The overall average for the three years is around 5%.
Now let’s say the difference the return and the average is roughly at:
- Year 2- 15%
- Year 3- 20%
Squaring these, you will get a deviation and variance close to 200%. Your standard deviation from this then stands at a tad lower than 15%.
Positive vs. negative variances
It is interesting to note that the variance is never unidirectional. Especially for budget variance reports, you can have both negative and positive scenarios. Essentially this is dependent on both the key calculation metrics as well as the quality of analysis. External factors like seasonal changes, for example, can play a role in it.
Positive variance
Typically a positive variance refers to favorable variances in the report that you have compiled.
It means the gains are more than anticipated and have been due to certain unexpected factors. It creates a surplus and additional gains from a variety of factors. So then the company has to get back to the drawing board and recalibrate the assets available.
It can also result in a refined asset allocation for them as well. Additionally, this can be also due to sudden unprecedented one-time windfall of some type. This can skew numbers adversely.
Negative variance
This is the exact opposite of the positive variance. This is the outcome of some unfavorable development.
The losses could have been the direct result of some sort of calculation error or even some environmental factor. For example, if you are in the cement business, the cyclical factors come to play like rains and festive demand for new houses. As a result, demand for cement is likely to spike up around then. But let’s think of the time soon after the subprime crisis, prices completely bottomed out and the demand for houses too came down. It is almost natural that the cement prices will slip as well. Therefore, a negative variance is not surprising in this circumstance.
Nevertheless, these numbers and the variance especially will give the owners a sense of the market and give them cues on how to taper down the assumptions for the following few quarters.
Common types of variances
But when you consider the variance report, it is very obvious that there are some basic parameters that keep shifting on a regular basis.
1. Price variance
In this case, as the name suggests the variance comes in the price of the material. When the actual price of the material differs significantly from the standard price you get this variance.
This is also a result of the difference in the actual output and usage levels compared to the standard ones. So, in this case, you have to keep in mind four factors:
- Actual usage. Sometimes you can get quantity discounts when you are buying larger quantities, so more materials get used to accommodate the price difference.
- The actual price being lower or higher than the standard market rate.
- The quality of the materials is also crucial. Sometimes buying lower grade or higher grade quality compared to the standard rate can be problematic too.
- The unavailability of certain products may also result in opting for another alternative. Both in terms of price and quality, it can add a different dimension to the overall variance report in a significant manner and alter the final deductions.
2. Usage variance
As the name indicates, when the usage levels are different from the standard rate, it leads to the formulation of the following report:
- Replacing the standard material with an alternative can affect usage. You may have to increase or decrease quantity as per the new requirements.
- The relative yield from the material needs to conform to expected levels. In case there is an anomaly here, it results in a variance.
- The rate of scrap from the material used can also play a crucial role in the ultimate deductions.
3. Labor variance
The labor variance refers to the cost of labor. The actual rate, in this case, at times differs significantly from the standard or assumed rate. There can again be several reasons for this making a difference in the variance report:
- If the standard rate of wage is significantly below or above the existing one.
- Actual labor hours vs. the standard labor hours can also affect both quality and efficiency. This can, in turn, have a bearing on the prices.
- Impact of special situations like strike, lockout and the like.
- Overall efficiency of the labor counts as well. If they are very efficient then, 4 laborers in 5 hours can work the same that 10 may be able to achieve in 8 hours.
4. Overhead spending variance
This refers to the overhead costs in the business. Technically it can be anytime and anything. The trick is all about incorporating the potential variables:
- Sudden one-time expenses or emergencies that have a bearing on the overall input cost.
- Potential external factors that might affect the demand for the final product.
- Labor unrest or special steps taken to offer additional financial compensation to the laborers for a specific year.
- Faulty production due to any oversight that will have to be rejected and the company has to digest the expense.
How to write a variance report
So now that you have all the elements of computing a variance report, the next step is writing it down.
For the income statement example above, the budget for each account is listed after the account name followed by actual results. This sets the stage for the variance and then a visual favorable or unfavorable presentation. The example doesn’t show it, but variance reports can also have a column for a percentage of change to make the data even better.
Unfortunately, a variance report can’t be finalized until the actual events occur. However, a lot of work can be done beforehand by creating the template. This way turn around time once results are final will be much faster.
On the whole, most variance reports follow this strict protocol while writing it. But remember a variance report contains a lot of numbers and it is important to highlight the most relevant factors in the proper light. That will optimize its utility.
While variance reports can be a pain point for any professional, they are invaluable in communicating results to external stakeholders and decision-makers.
Now that you’ve mastered the basics of these reports you should be equipped to conquer your next assignment. Want to keep growing your knowledge?
Check out GoSkills Finance and Project Management courses where you can practice your new variance reporting skills.
And taking things up a notch with our guide to analysis of variance (ANOVA) .
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Brandon is a full time CPA specializing in all things tax. When he is not serving clients, he enjoys spending time with his wife and son, real estate investing, and sipping fine bourbon.
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Updated: July 14, 2023 |
Variance reporting: What is it + how to read/write a variance report
Billy is an expert in the FP&A space. Before joining Cube at the seed stage, Billy found success as a tax advisor at companies like Grant Thornton LLP and Gemini.com. He holds a BA and MA in Accounting from William & Mary and splits his time between NYC and New England.
We hate to admit this, but things don't always go to plan.
That is: we don't always hit our forecasts. And we don't always follow the budget.
So it's critical to understand where actual performance deviates from forecasts.
Because that understanding helps the finance department do a better job with the next forecast.
And how do you report on and explain that deviation?
Enter: the variance report.
Variance reporting is the practice of monitoring and identifying the causes of variances in your numbers.
And in this guide, we'll tell you what it is, how to read or write a variance report, and even how to get better at forecasting.
Keep reading.
Billy Russell
FP&A Strategist, Cube Software
What is variance reporting?
How do I write a variance report?
How do I read a variance report?
Common types of variances
How to reduce budget variances
Variance reporting explained
Get out of the data entry weeds and into the strategy.
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Variance reporting is exactly what it sounds like—finding differences between what you planned and what actual data results from your business activities. Variance reports are used to identify the occurrence and reasons for changes in the plan.
Variance reporting can show the difference between budgeted and actual results or between budgeted and forecast results . Each of these analyses helps FP&A leaders make better decisions about the company's short- and long-term financial plans.
The larger the gap, the greater the need to understand the cause(s) of the variance.
Variance analysis helps you identify the reason for the differences. Identifying and explaining variances is essential as they hold the keys to better future performance. Variances happen for various reasons (fluctuating costs, sales numbers, pricing, and overhead). They can be positive or negative.
The variance report is a written document, often in the form of an Excel spreadsheet, that shows the business owner and other stakeholders the variance in revenue numbers or expenses over a specific period.
Why is variance reporting important?
Capturing and understanding variances are crucial to controlling future costs and maximizing profit. The sooner you see and handle a variance, the less likely it is to affect the organization's long-term profitability and financial health.
Positive variances are equally crucial to financial health, as they may reveal areas to improve procurement, profitability, or time to market.
Using variance reporting, companies improve the efficiency and performance of the organization:
Reduced spending: Variance reporting reveals tail spend and increased overhead costs before they can get out of control and sap profitability. By comparing actual spending versus projected spending or expected benchmarks, Finance can understand whether spending results from external forces (like inflation or supply chain issues) or uncontrolled spending.
Tighter operations: Variances in materials usage may signal the need for refining production practices within the organization. Reducing materials waste, increasing productivity, and optimizing manufacturing processes can create significant savings.
Stronger sales: Variance reports reveal areas where your data or assumptions miss the mark. Seeing and explaining variances may identify areas for improvement in marketing, procurement, logistics, or sales that will increase value creation and customer acquisition.
When is variance reporting used?
Variance reporting can be used to regularly monitor deviations between planned and actual numbers. Some organizations (typically younger and smaller companies) conduct variance analysis quarterly.
Larger companies, or companies with more complex needs, may create variance reports monthly. Conducting a variance report as part of the month-end closing procedures allows you to see issues or realize opportunities as they arise.
Significant positive or negative variances may require context in the financial reports or financial statements (like the income statement, balance sheet, and statement of cash flows) delivered to stakeholders as part of monthly financial reporting .
Predetermined variance report vs. ad hoc variance report
As described above, many organizations create variance reports at predetermined intervals throughout their fiscal year. Non-technical stakeholders may also need ad hoc variance analysis to gain an understanding of the numbers. With the right software, users can use data and create ad hoc reports without calling IT for canned reports.
How to write a variance report
Most variance reporting occurs in a spreadsheet, where you can analyze the numbers and understand the origin and impact of variances.
Templates ( like this one! ) allow you to quickly set up a variance report and pull in the numbers for analysis.
The two variance formulas
There are two ways to calculate variance: as a numerical dollar value and a percentage difference.
The dollar value variance formula shows the difference between actuals and the forecast as a dollar amount.
The percentage variance formula shows the difference between actuals and the forecast as a percentage
When you want to show raw dollars and cents, use the dollar value variance formula.
But when you want to show a percentage (for example, if you're interested in tracking variance over time), you should use the percentage variance formula.
Dollar value variance formula
For the dollar value variance , the formula is:
Actual - forecast = variance
Variance percentage formula
For the variance percentage , the formula is:
Actual ÷ forecast - 1 = variance
The result is a percentage.
Steps to completing a variance report
Use these steps to complete a simple variance report:
Organize your data: Start by separating your revenue from expenses. The revenue section should include line items like revenue, cost of goods sold (COGS), profit, EBITDA , operating income, and net income. Be sure you have complete data sources and that your data is up to date.
Arrange your report: Start a column for each piece of your report: The Item, the actual amount, the forecasted amount, and the variance. A fifth column can report it as positive or negative.
Add context : For each variance, add notes to the report to explain the variance. Identify any contextual information a reader would need to know to understand the numbers.
Your final report should be free of errors, so double-check your data points to ensure accuracy.
How to read a budget variance report
When analyzing variance reporting, you may encounter two different types of variance: Positive and negative. You may see both in different sections of the same report.
Positive variance
This is when your results outperform estimates (overall or in one aspect of the budget). Positive variances result from changes such as better-than-expected prices on materials, higher sales, lower overhead costs, or more efficient production. Positive variance is a windfall for the company.
Positive variances in one budget item can buffer against less favorable performance in another. For instance, you may miss a sales goal but produce goods at lower-than-expected cost. Look for context when the report contains offsetting variances.
Negative variance
On the other hand, a negative variance occurs when actuals underperform compared to the plan or budget. This occurs when some element of the budget is costlier than expected.
For instance, if materials estimates come in lower than actual use or labor costs to produce your product exceed the budget, the result is a negative variance.
Common variance types
Variances occur in one or more aspects of the budget or forecast. In general, fluctuations in these four areas result in accounting variances:
1. Price variance
The difference between the actual price of a good or service and the price you budgeted to pay for it.
The price variance measures how well a company can stick to its specific goods and services budget . It may also shed light on the strength of negotiation when acquiring the materials, supplies, and services used to produce a product.
Price variance may occur due to external factors such as rising commodity costs or transportation expenses.
2. Usage variance
The difference between the actual amount of a particular resource used and the amount budgeted.
This variance can be positive or negative, and it can be caused by changes in the amount of the resource used, changes in the price of the resource, or changes in the amount of the budget.
Negative variances in usage may point to poor estimates, issues in the manufacturing process, or quality control concerns due to materials lost or wastage.
3. Labor variance
The difference between budgeted and actual labor used in a given period.
Factors such as changes in the number of employees, changes in the wage rate, or changes in the level of activity can cause labor costs to fluctuate from the budget.
4. Overhead spending variance
The difference between your budgeted and actual overhead costs. Many factors can influence this variance, including the use of resources and changes in the rate at which these resources are used.
Overhead spending variances impact profitability by increasing or decreasing your net income.
How can you reduce budget variances?
Suppose your actuals are drifting from the plan or forecast. In that case, these steps can help you understand the shifts and improve future planning exercises:
Identify the variance: What’s happening in the budget or forecast? Where is the variance occurring? Identifying where (and when) things deviate from the plan helps you contextualize the change and adjust as necessary. Is this a specific event or a trend variance occurring over time?
Understand the timing: Ensure your variance isn’t a matter of incomplete data. Check that the variance isn’t a misalignment in accruals (for instance, invoices recognized but not yet received for payment).
Investigate and refine: Identify the root of the variance and whether it requires adjustments to your budget due to changing market conditions. Based on this assessment, make necessary adjustments to projections, pricing, sales activities, or production practices to course-correct a variance.
Conclusion: variance reporting explained
Calculating and understanding variances helps Finance make better financial decisions and keep the company’s position strong.
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- A Guide to Variance Reports for Project Management
Have you been tasked with writing a variance report? Maybe you aren’t sure where to start. That’s normal. ‘Variance’ could encompass many things, so the term isn’t exactly straightforward.
Googling “variance report” might not have helped so far if you’re a project manager . That’s because variance reports are also used in finance, where they take a slightly different form.
Don’t worry. In this article, we’ll walk you through what a variance report is, why you might need to write one, and how you can make it as useful and informative as possible. Let’s get started!
What’s a variance report?
To start, let’s define variance. Just as you might think, variance is “the quality of being different, divergent, or inconsistent.”
In project management, the goal of a variance report is simple — to explain the differences between what you planned for and what actually occurred. You’ll usually write one after the completion of a project, as part of reporting on its outcomes and evaluating its success.
Often, variance reports focus on financial information, such as how much the project’s final costs exceeded or fell below what was budgeted for. They’re most commonly used in accounting and finance, with complex formulas and exclusively numerical data. But in a project management context, there’s no need for you to use them that way.
Costs and timing are the values you’d most likely include in a project variance report. But you can adapt them to include all kinds of data, qualitative or quantitative.
Why you need variance reports
As the project’s manager, or even an individual contributor, you’re already familiar with how things turned out. You already know whether your project went according to plan, so writing a report about it might feel redundant. If someone wants that information, why can’t they just ask you?
The answer is that leaders, stakeholders, partners, and anyone else involved in a project needs to be able to understand how it turned out, quickly and easily. They might be using your variance report to assess the success of your project, or learn how it could be conducted more efficiently next time.
A variance report gives them access to that understanding whenever they need it, without needing to ask you, or anyone else, for your insights.
What to include in a variance report
To convey how much (or little) your project varied from the plan, a variance report includes four categories of information.
- The project’s budgeted or expected outcomes
- The final costs or results in reality
- The variance, or difference, between them
- Why the variance occurred
As shown here, it’s not enough to simply tell people the project had different outcomes than expected. You need to explain exactly how much or little they varied, why it happened, and the impact it will have on your organization in tangible, practical terms.
There are so many different kinds of variance you may need to include in your report. Some of the most common are:
- The cost of goods and services required to complete the project
- The amount of resources the project consumed, from data storage to lumber
- The labor required, and how much it cost the company
- Unforeseen issues, like materials shortages, supply interruptions, or emergencies, and what they cost
Each kind of variance will fall into one of two categories: positive and negative.
- Coming in under budget
- Finishing ahead of schedule
- Producing more than you anticipated
- Exceeding your budget
- Missing key benchmarks
- Delivering work past deadline
How to write your report
Usually, variance reports are pretty number-centric. Most use a 3- or 4-column table to show the expected value, actual value, the variance between them, and some notes on why it occurred.
If your data is more qualitative, you could still use this formatting by adding point-form, bulleted text into your table.
If your data is very text-heavy, you could also try clearly labeled sections for each category of data, such as staff experience, audience reaction, or customer sentiment. Use subheadings to clearly break down each section into the expected outcome, real outcome, reasons for the variance, and its impact.
Remember that the stakeholders who will be reading your report are busy. They need to understand your message as quickly and easily as possible.
That’s why you should prioritize clarity and legibility when writing your variance report. Here are a few tips:
- Highlight or bold the most important information
- If the report is long, start with a table of contents and executive summary
- Use headings and subheadings
- Include plenty of white space around each section or column
- Make the report as clean as possible. If you’re using a table, remove the black bars between rows and columns, and align all the numbers in every column
Why are reporting workflows such a headache?
We wondered the same thing. That’s why we ran a survey to determine what reporting workflows are like across organizations of all sizes, what the biggest hurdles are, and how people tend to overcome them. We compiled and compressed that data into Unito’s Report on Reporting.
Get the ebook here.
Embrace the variance.
As a project manager, you already have in-depth knowledge about your plans for the project, and how they turned out in reality. The goal of a variance report is just to express that knowledge in a clear, concise, and easily understandable way.
Of course, variance reports are useful for leaders and stakeholders. But writing them can also give you a chance to pause, look back on your project, and think about what you learned. Who knows? You might even find that writing variance reports becomes an important part of your project management style.
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The definitive guide to variance reports.
You’re a business owner, and you want to know how your company is doing. A variance report can help you figure that out! It’s an accounting report that shows the difference between expected results and actual results. In other words, it tells you whether or not your budget was met for a specific period of time. If there are any deviations from the budget, they will be identified in this document. This helps you make informed decisions about what needs to happen next.
This guide will teach you about variance reports. It has everything from why companies use them, to how they work with budgets and much more. All of this information is packed into one easy-to-read article. Read on to learn more.
Here’s What We’ll Cover:
What Is a Variance Report?
How to prepare a variance report, key takeaways.
A lot of business owners use variance reports as a daily basis to examine the productivity and the effectiveness of their employees. They need these numbers in order to make sure that they are getting what they paid for, and if not, where could the problems lay. Variance reports are definitely not something that you can overlook.
Variance reports are usually performed weekly, monthly, quarterly and even yearly. Even if these reports aren’t being conducted on a daily basis, the company still needs to have a good grasp on what is going on. Without the information that a variance report provides for you, it’s hard to make informed decisions.
There are different types of variance reports, but they can generally be broken down into one of two categories: predetermined and ad hoc.
Predetermined Variance Reports
A predetermined variation report is when you have your budget planned out in advance. This means that the deviations from that original plan will be looked at more closely. These reports are generally conducted on a monthly, quarterly or yearly basis.
Aerospace and Defense companies typically use predetermined variance reports because they need to comply with certain regulations set by the government.
Ad Hoc Variance Reports
An ad hoc variance report is when you have unexpected numbers that need to be looked at quickly. This report will help you make decisions about what the best course of action is for your business. The good thing about these reports is that they can be run on a daily, weekly or monthly basis.
Even though this type of report is typically used only in emergency situations, it’s still helpful to have one prepared. It could be the difference between the success and failure of your business.
A variance report is usually prepared by an accountant. It’s not too complicated to actually do it yourself though. Spend some time looking at budgets, actual numbers, and financial reports before diving into any calculations that might be necessary. The information you find will be used in the report.
The best way to prepare a variance report is to identify all of your assets and liabilities before you record anything. It’s always helpful to use what you already know about your company and its employees when compiling this document. You want it to reflect as accurately as possible how everyone is doing so that the company can move in the right direction.
Steps to Completing a Variance Report
Prepare the documents ahead of time so that nothing is overlooked. Taking notes on each step will help eliminate any problems or mistakes before they even happen. Follow these steps to get the most accurate results the first time around.
- Look over your company’s financial statements and identify which numbers are being used for this report. For example, revenue is usually measured by either last year’s actual sales or budgeted sales. This will make it easier to understand what you’re working with.
- List all of your fixed assets. A fixed asset is something that is expected to last longer than one year, which is usually depreciated over the course of several years.
- List all of your current liabilities, including accounts payable if you’re not using an accrual basis for this report.
- List the revenue numbers, either actual or budgeted.
- List your expenses, both fixed and variable. These can include supplies, sales commissions, rent costs, etc.
- List the numbers that you used to calculate any variances in revenue or expenses. You will have to use these numbers in order to analyze any differences in the final report.
- Add up your expenses and subtract them from your revenue to get the difference. This is the amount of money that you will have available for either growth or extra funding.
- List any variances in revenue or expenses by putting them under their respective headings on your list.
Variance reports are important documents that help you track your company’s financial status. When used properly, they can tell you whether or not the business is running smoothly and how it should be managed in order to avoid problems down the line.
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- A Guide to Variance Reports: Definition and Examples
A variance report is a planning document that compares budgeted amounts for expenses and revenue to actual results. This type of reporting can also show deviations between budgeted and forecasted results.
Conducting variance analysis can help your company take corrective measures when budgeting. Read on to view examples, learn how to write a report, and compare different types of variances.
Variance Report Example
How to prepare, calculate variance percentages and dollar amounts, positive vs. negative variances, common types.
Variance reporting allows businesses to pinpoint overspending and monitor cash flow overall. In the example below, ACME Corporation prepared an income variance report for the month ending in February 28, 2014. The company compared income and expenses during this period against a selected period.
The difference for each line item appears as both a number and percentage. Variance reporting lets the company know how it is performing in key areas and helps manage costs.
In the sample above, travel expenses represent a negative variance, exceeding the prior period’s costs by $78.87 or 371.85%. ACME Corporation should investigate the causes of increased travel spending and revise its budget or take corrective actions, if necessary.
Before you begin, you’ll need financial statements like your budget, income statement, or balance sheet to source budgeted and actual numbers.
Next, place the revenue and expense line items into separate sections. For example, your revenue section might include cost of goods sold (COGS), gross income, and net sales. The expenses section might consist of total operating expenses and operating income.
Prepare your variance report using four steps: Insert your actual revenue and expenses into your first column.
- Insert your budgeted revenue and expenses into the next column.
- Calculate the difference between your budgeted and actual numbers. List differences in the next column.
- Calculate the percentage difference using this formula: (actual results / budgeted results) -1 x 100. List percentages in your final column.
In the budget variance report above, ACME Corporation budgeted $6,500 for salary expenses, but the actual cost totaled $6,743.96. To calculate the dollar amount, you would subtract the budgeted amount from the actual cost:
$6,743.96 - $6,500 = $243.96
You would then calculate the variance percentage with the following formula:
(Actual results / budgeted results) -1 x 100 ($6,743.96 / $6,500 ) -1 x 100 = 3.75%
In this case, you’re 3.75% over budget for salary expenses, an example of negative variance.
Also known as favorable variance, positive variances occur when actual revenue is higher than forecasted and expenses are lower than forecasted. Positive variances also indicate lower manufacturing costs or operating expenses than the budgeted amount.
Negative variances indicate a budget shortfall, where costs come in higher than initially forecasted or when revenue is lower than expected.
There are four main categories of variance:
Direct labor variance: Direct labor variance describes a scenario where the actual labor cost differs from the expected or standard rate. It can also refer to labor efficiency variance , where the number of units produced in a standard hour of labor differs from actual performance.
Direct material variance: One example of this type of deviation includes purchase price variance , where the expected cost of raw materials differs from the actual price. A second example includes material yield variance , where a discrepancy emerges between the expected and actual quantity of materials required for a standard number of units produced.
Overhead spending variance: Discrepancies in overhead costs could stem from changes in fixed and variable overhead expenses . Fixed overhead costs can include recurring expenses, like mortgage payments and property taxes. Variable overhead costs include emergency equipment repairs, energy expenses, or raw material costs.
Sales Variance: Sales deviations include sales price variance and sales volume variance , where a company makes sales at a price or volume either lower or higher than expected. Analyzing these differences helps businesses evaluate market conditions and optimize business decisions.
What is the difference between predetermined and ad hoc variance reports?
Predetermined variance reports show deviations between budgeted income and expenses and actual amounts. Companies run these reports on a monthly, quarterly, or yearly basis.
Ad hoc variance reports analyze anomalies in numbers as needed, showing deviations in real time. Accountants might run these in emergencies or on a daily, weekly, or monthly schedule.
How do I reduce budget variances?
Businesses can reduce unfavorable variances by taking the following steps :
Identify where the discrepancy originated. Through variance reporting and analysis, your company can determine where the deviation occurred – for example, in the direct materials cost line item under operating expenses.
Determine when the discrepancy occurred. For example, timing variances might occur due to late invoices or early payments. Generally, the next financial period will reverse this temporary variance.
Investigate why the discrepancy occurred. In the direct materials variance example, determine the cause for the pricing change: has the standard purchase price fluctuated? Are the raw materials yielding fewer units than anticipated?
Take corrective measures to prevent future discrepancies. This could mean finding cheaper alternatives to raw materials used in production, or shifting your budget to reflect new standards in direct labor costs.
Is there a way to automate variance reporting? You can improve your business finances with accounting software. In addition to automating variance reporting, a basic accounting system can help improve revenue and expense tracking with accounts payable, accounts receivable, and general ledger modules.
VARIANCE REPORT: Detailed Guide To Variance Reporting
- by Peace Fred
- April 19, 2022
- 8 minute read
Table of Contents Hide
What is a variance report, #1. predetermined variance reports, #2. ad hoc variance reports, step #1: gather data, step #2: input the actual data, step#3: contrast actual with budgeted, step #4: examine the results, how to interpret variance report results, when should variance reporting be used, what steps can you take to reduce the budget variance report, positive vs. negative variance, negative variance, variations that are commonly encountered, variance report faqs, what are the causes of variances, related articles.
Monitoring actual results against projected results is an important component of financial planning and analysis (FP&A). Variance reporting is one strategy used by financial analysts to compare actual performance to expectations. Once a budget is created and approved by management, there must be systems in place to track the organization’s progress in executing the framework. The variance report is one of the most widely utilized financial and budget instruments in the corporate finance industry. Accountants prepare variance reports on a regular basis as part of management reporting packages that are evaluated on a regular basis. Here will learn how to write and interpret a variance report.
A variance report is a document that contrasts the planned and actual financial outcomes. In other words, a variance report compares what was expected to happen with what actually occurred. Typically, variance reports are used to examine the gap between budgeted and actual performance. Depending on the financial outcomes being compared, the variance report may alternatively be referred to as “budget variance” or just “variance.” The discrepancy between the budgeted/baseline target and the actual reality is referred to as “variance.” Variance can be expressed as a percentage or as a monetary value.
Types of Variance Report
There are various sorts of variance reports, but they can be divided into two categories: predetermined and ad hoc.
When you have your budget laid out ahead of time, you will have a predetermined variance report. This implies that departures from the original plan will be scrutinized more closely. These reports are typically issued on a monthly, quarterly, or annual basis.
Aerospace and defense businesses usually employ predefined variance reports in order to comply with government restrictions.
When you have unexpected results that need to be looked at immediately, you should create an ad hoc variance report. This report will assist you in determining the best course of action for your company. These reports have the advantage of being able to be run on a daily, weekly, or monthly basis.
Even though this type of report is normally needed primarily in emergency situations, having one on hand is still beneficial. It could mean the difference between your company’s success and failure.
How to Write a Variance Report
Variance reporting can be accomplished in a variety of methods, but it always begins with a budget and projection.
Without these components, there is nothing to compare the actual outcomes against. Whatever budgeting method is used, all budgets will result in a financial plan. This plan serves as the framework for comparing real results.
Outside of financial variance reports, the most typical types of variance reports include buying price variance, labor rate variance, material yield variance, and volume variance.
The instructions below apply regardless of the type of variance report you want to write.
Before you begin, sort your budgeted data into columns that will allow you to simply aggregate the data you want to compare. You can use the pro forma financial statements generated as a result of the budget process to generate financial variance reports.
Aggregate the actual data for the period in the columns next to your projected data sets.
This would be the actual balance sheet, income statement, and cash flows for financial variance reports. Make sure both columns are labeled clearly.
Determine the difference between your budgeted and actual data in the following column. Pay strict attention to the formula’s direction.
For example, if expenses are higher in the anticipated period than in the actual period, this is a positive indicator.
Calculate the percentage difference in the following column. This is accomplished by multiplying (Actual Results / Forecasted Results) by 100.
The most important part of variance reporting is this. Take the effort to comprehend what the variance report is saying.
All deviations should be explored and explained in the final management report. Managers should be able to clearly identify where the problems that caused the variance originated.
Make sure to give equal attention to any good deviations that occur. This allows management to concentrate on efficiency and other enhancements that may be functioning better than intended.
The variance report is frequently regarded as the major tool for effectively regulating future expenditures and conditions. They are the ideal illustration of how independent numbers interact with one another in a larger group.
The most significant advantage of this style of report, in statistical terms, is that it provides equal weight to all types of deviations in an analysis. With this type of number reporting, you cannot reach a sum of zero regardless of the direction of their deviation from the mean. As a result, there will never be a circumstance in which there appears to be no deviation or variance.
This simply means that even the tiniest deviation is adequately accounted for in the variance report results.
However, this causes a minor hitch. The interpretation of the variance report is more complicated than you thought. You must have a thorough comprehension of this mathematical process, the dynamics of the industry under consideration, and the precise figure.
Remember that variance gives each of these data points more weight, and squaring them might skew the statistics in a sophisticated and confusing way. Most importantly, it will not fulfill the primary objective for which it is calculated in any meaningful way.
Read Also: LINE ITEM BUDGET: Benefits and Examples
Perhaps an example will help to make the point more effectively. Assume we are creating the variance report for Company X. The following are the results:
- Year 1 has a 10% success rate.
- Year 2 has a 15% success rate.
- The 3rd year has a 10% chance of success.
The aggregate average over the last three years has been roughly 5%.
Let’s say the difference between the return and the average is about equal to:
- 5% for the first year
- 15 % in year two
- 20% in the third year
When you square this, you obtain a deviation and variance close to 200 percent. Your standard deviation from this is then a little less than 15%.
What are the Characteristics of a Good Variance Report?
There are two signs of a positive budget variance:
- The revenue is greater than the budgeted amount, or
- The budget is less than the budgeted amount.
Any variance that puts money back into the business coffers is a win. On the other hand, an adverse budget variance results in a financial loss. Unfavorable budget variance indicates that you employed an insufficient baseline to predict future results.
Budgetary analysis, sales target analysis, trend reports, and spending analysis all make use of variance reporting.
Improving budget variance report begins with setting your budget targets. In order to set realistic goals, you must be able to:
- Get access to previous budgets
- View current performance statistics, such as expenses/costs, revenue, customer information, market information, and historical trends.
- Create accurate forecasts and models using real-time and historical data.
- Experiment with different circumstances.
- Recognize the impact of finance on operations and vice versa.
It’s worth noting that the variance is never unidirectional. You might have both negative and positive situations, especially for budget variance report. Essentially, this is determined by both the major calculation metrics and the quality of the analysis. External variables such as seasonal changes, for example, can contribute to it.
Positive Variance
A positive variance often refers to beneficial variations in the report that you have generated.
It suggests that the profits were greater than predicted and were caused by unanticipated reasons. It generates a surplus and gains from a variety of sources. As a result, the corporation must go back to the drawing board and recalculate the available assets.
It may also result in a more refined asset allocation for them. Furthermore, this could be the result of a one-time, unprecedented windfall of some kind. This can cause numbers to be skewed.
This is the inverse of the positive variance. This is the result of undesirable development.
The losses could have been caused by a computation error or even by an environmental condition. For example, if you work in the cement industry, cyclical elements such as rain and holiday demand for new homes come into play. As a result, demand for cement is expected to increase around that time. But consider how, soon after the subprime crisis , prices entirely bottomed out, and demand for houses fell. It is almost inevitable that cement costs would fall as well. As a result, a negative variance is not uncommon in this situation.
Nonetheless, these figures, particularly the variance, will provide owners with a feel of the market and clues on how to reduce their expectations for the coming quarters.
However, while looking at the variance report, it is clear that there are several fundamental characteristics that shift on a regular basis.
#1. Price variance
The variance in this situation, as the name implies, is in the price of the substance. This variance occurs when the real price of the material differs greatly from the standard price.
This is also due to the disparity between the real production and utilization levels and the standard ones. So, in this scenario, you must consider four factors:
- Actual application. When purchasing in bulk, you may be able to obtain quantity savings, resulting in the use of additional resources to compensate for the price difference.
- The actual price may be lower or greater than the market rate.
- The materials’ quality is also critical. Buying lower grade or higher grade quality in comparison to the usual rate might sometimes be problematic.
- The unavailability of specific products may also lead to the selection of a different option. It can add a substantial dimension to the entire variance report, both in terms of price and quality, and change the ultimate deductions.
#2. Usage Variance
As the name implies, when consumption levels differ from the usual rate, the following report is generated:
- It is possible that substituting a different material for the usual one will have an impact on usage. According to the new standards, you may need to raise or decrease the quantity.
- The material’s relative yield must be consistent with expectations. There is a variance if there is an oddity here.
- The rate of scrap from the material used might also have a significant impact on the final deductions.
#3. Labor variance
The labor variance refers to the labor cost. In this scenario, the real rate differs greatly from the standard or expected rate. Again, there could be various causes for this affecting the variance report:
- If the standard pay is much lower or higher than the current one.
- Actual labor hours versus standard labor hours can also have an impact on quality and efficiency. This can, in turn, has an influence on the prices.
- Special situations such as strikes, lockouts, and the like have an impact.
- Overall labor efficiency is also important. If they are exceptionally efficient, 4 laborers in 5 hours can accomplish what 10 may be able to accomplish in 8 hours.
#4. Overhead spending Variance
This refers to the company’s overhead charges. Technically, it can be at any time and in any place. The key is to take into account all of the various variables:
- Unexpected one-time charges or catastrophes that have an impact on the overall input cost
- External elements that may have an impact on the end product’s demand.
- Labor disturbance or special measures made to provide more financial recompense to workers for a given year.
- Faulty output as a result of any oversight will have to be rejected, and the corporation will have to absorb the cost.
While variance reporting can be a source of frustration for any professional, they are critical in communicating findings to external stakeholders and decision-makers.
You should be ready to tackle your next assignment now that you’ve learned the fundamentals of variance reporting. Do you want to expand your knowledge? Check out our related articles.
Variations might occur for internal or external reasons, such as human mistakes, unrealistic expectations, or changing business or economic conditions.
What is income variance?
This is the discrepancy between actual and expected income. The variance is said to be positive if the actual figure is higher than expected. If it is less than the projected figure, you have a negative income variance.
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Variance Reporting: Understanding its Impact on Financial Management
✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.
Variance Reporting Definition
Variance reporting is a standard procedure in financial accounting and budget management that involves comparing actual financial performance with budgeted or projected figures. The report identifies discrepancies or variances between these sets of data, revealing insights into a company’s financial performance and aiding in future decision-making processes.
Importance of Variance Reporting
Variance reporting acts as a navigational tool for businesses, making it a critical part of financial management and effective decision-making process. It provides insight into its financial operations, enabling them to identify and analyze the difference between actual and budgeted performance.
One of the main benefits of variance reporting is its role in facilitating better budgetary control . As businesses implement their plans, they must continuously compare planned costs against the actual spending. Here, variance reporting serves as an essential tool. When there are deviances, the report assesses them and provides an explanation for the differences. This is valuable as it allows the management to take corrective actions if it is found that certain costs are spiraling out of control. Moreover, being able to accurately detail where costs are exceeding budgets can lead to more effective resource allocation and cash flow maintenance.
Variance reporting also allows for better performance measurement . It compares the actual performance of the business against the expected performance. Performance may be associated with profits, sales performance, or various operational metrics, amongst other things. This comparison will indicate the efficiency of operations, and any discrepancies will be identified as variances.
This identification allows businesses to note whether they are achieving their targets or understand the reasons if they are falling short. Variance reporting can also be used to identify trends over time, giving businesses a better understanding of how their performance is progressing.
In conclusion, the importance of variance reporting in financial management cannot be overstated. It plays a pivotal role in the decision-making process by providing insights into budgetary control and performance measurement, which are critical for any business's success.
Understanding Types of Variances
Sales variances.
Sales variances are a result of the difference in actual and expected sales. They can be classified as price and quantity variances. A price variance occurs when the actual selling price differs from the budgeted selling price. A positive price variance implies that the actual selling price was higher than the budgeted one, which directly translates to higher revenues. On the contrary, a negative price variance indicates a lower-than-expected selling price, leading to lower revenues. Quantity variances occur when a company sells more or fewer units than anticipated. A positive quantity variance, resulting from higher sales than expected, can lead to a higher profit margin, while a negative quantity variance can decrease the profit margin.
Cost Variances
Cost variances occur when actual costs deviate from the estimated costs. They are further classified as direct material, direct labor, and overhead variances. A direct material variance can be due to a price or usage difference. If a company pays more for raw materials than expected, it results in a higher cost, leading to a negative variance. Conversely, if less raw material is used than expected, it can lead to a positive variance. Labor variances can also arise from rate (pay per hour) or efficiency (hours worked) variances. Overhead variances can fluctuate due to capricious changes in fixed and variable overheads.
Volume Variances
Volume variances are caused by changes in the number of units produced compared to the budgeted quantity. They showcase how efficiently a company is using its capacity. A positive volume variance means that a company produced more goods than planned, which can be beneficial if there's sufficient demand in the market. However, it could also lead to an increase in inventory if not managed properly. Conversely, a negative volume variance implies that less was produced than planned, which could be due to reasons like equipment failure or labor strikes. It can result in loss of potential sales and revenues. It's crucial for companies to manage these variances effectively to streamline their processes and enhance profitability.
Variance Reporting and Budgeting
Variance reporting's impact on budgeting.
Understanding variance reporting's role in budgeting can provide invaluable insight for businesses. The operational budget of a company is a projection of expected income and expenses for a specific period. It acts as a guiding map for the company's financial direction. Variances from this budget can help recognize areas where results significantly diverge from expectations.
Identifying Necessary Adjustments
Variances themselves are essentially differences between budgeted figures and actual results. By regularly conducting variance analysis, businesses can keep a constant check on their performance. In situations where actual spending exceeds budgeted amounts, companies can identify problematic areas and make necessary adjustments. Similarly, when actual income is below the budgeted figure, it would alarm the need to explore possibilities for improvement. Adjustments could involve revising operational strategies or altering resource allocation – all to ensure better alignment with financial objectives.
Facilitating Accurate Projections
Beyond reacting to current conditions, variance reporting can also inform future budgeting exercises. By investigating the reasons behind variances, businesses can understand trends and patterns. These insights may help in creating more accurate future budget plans. If particular variances recur across several budgeting periods, it could indicate persistent systematic issues – something that might not have been evident without regular variance reporting.
The function of variance reporting in predictive budgeting cannot be overemphasized. Identifying where the business consistently overperforms or underperforms against the budget allows for more precise forecasting. This further ensures that future budgets are not only based purely on historical data but are also informed by understanding the reasons behind past variances. The result is an increasingly robust and reliable budget, optimized for the business's unique operational context.
In essence, it's clear that variance reporting acts as a corrective and predictive tool in budgeting. When used diligently, it can aid in maintaining financial control and ensuring optimal resource allocation, leading to better financial health and growth of the business.
The Role of Variance Reporting in Financial Analysis
As a fundamental component of financial analysis, variance reporting plays a pivotal role in providing insights that are crucial for decision-making and strategic planning. By quantifying the differences between budgeted and actual performance, it allows organizations to gauge the effectiveness and efficiency of their operations.
Variance reporting offers a clear, financial mirror of a company's activities, helping to isolate any operational issues that may exist. When a discrepancy is found between the budget and the actual results, it prompts financial professionals to examine the cause. These deviations might indicate problems such as cost overruns, issues with productivity or unexpected fluctuations in sales or revenue.
The Importance of Detection
Detecting these deviations early can give organizations the opportunity to address the issues, make operational adjustments and mitigate potential negative impacts on the bottom line. By identifying these problems early, the organization can take proactive measures to correct course.
For instance, a positive variance in sales revenue might initially seem like a pleasant surprise. However, digging deeper might reveal that the excess revenue was actually due to an unsustainable surge in orders that the company might not be equipped to handle in the long term. Without variance reporting, such a crucial insight could easily be missed.
Variance Reporting as a Tool for Improvement
On the other side of the coin, variance reporting is also an effective tool for identifying opportunities for improvement. Certain discrepancies might signal areas where a company could enhance operational efficiency or reduce costs. For example, a negative variance in labor costs could indicate a potential to improve efficiency, either by refining processes or investing in employee training. Similarly, a positive variance in materials cost could suggest a chance to negotiate better terms with suppliers or explore less expensive alternatives.
In conclusion, the role of variance reporting in financial analysis is less about reporting figures, and more about deriving actionable insights from those figures. In this context, a variance isn't just a discrepancy between what was planned and what actually happened – it's a signpost pointing towards opportunities to improve, grow and evolve as a business.
A Strategic Approach to Variance Reporting
Variance reporting is more than a simple budget monitoring tool. Companies can leverage it strategically to improve their operational performance, manage risk, and make informed decisions.
Harness Variance Reporting to Uncover Inefficiencies
Frequent variance analysis can expose patterns of inefficiencies within different operations. For instance, if a particular department exhibits frequent positive variances, company leaders could investigate the pipelines and determine whether those are indicators of significant process inefficiencies or stringent budget estimation. By identifying these areas, businesses can initiate programs or modifications to eliminate the redundancies and improve operational efficiency.
Ensure Budget Compliance
Monitoring budget variance helps in assessing the performance of the business against the predefined financial goals. It can highlight areas where spending is consistently higher than budgeted, thus encouraging inquiry into the root causes. Conversely, variance reporting can also signal areas of unplanned savings. Implementing regular tracking of budget variance minimizes the risk of non-compliance and ensures expenses stay aligned with the strategic financial objectives.
Drive Corrective Actions
Significant variances, either favorable or unfavorable, demand attention. Variance reporting can act as an early warning system for potential issues. For example, unexpected increases in cost might be symptoms of larger problems, such as supply chain disruptions or quality control failures. Immediate detection enables leadership to implement corrective measures swiftly and minimize financial and operational impacts. On the flip side, if a segment of the company is performing better than expected, investigations may uncover best practices that can be applied elsewhere in the business.
Overall, a strategic approach to variance reporting promotes financial awareness across all levels of the business. It also fosters an environment open to constant evaluation, adjustment, and improvement. This proactive approach can significantly improve the company's bottom line over the long run.
Variance Reporting and CSR Considerations
In evaluating the role of variance reporting in CSR, it becomes clear that this tool is crucial for tracking both financial performance and CSR initiatives. Let's dissect how variance reporting integrates with CSR and sustainability considerations.
Impact of Variance Reporting on CSR Activities
Variance reporting is a powerful tool for tracking the progress of CSR initiatives. By comparing the budgeted amount for a given CSR initiative to the actual expenditure, companies can quickly identify any discrepancies and adjust their strategy or resource allocation as needed. For instance, if a company has committed to reducing its carbon footprint by investing in renewable energy sources, but the variance report shows an overspend on traditional energy sources, this is a clear deviation that needs addressing.
Fundamentally, variance reporting helps pinpoint where CSR initiatives are faltering or exceeding expectations. This ability to track, and ultimately improve, performance is an essential aspect of responsible corporate governance.
Sustainability Reporting Incorporated into Variance Reporting
In much the same way, variance reporting plays a pivotal role when it comes to sustainability considerations. By providing a clear picture of how much a company is spending in pursuit of its sustainability goals versus what was budgeted, variance reporting can highlight where additional efforts are required or where resources could be used more efficiently.
Consider a company aiming to increase its usage of recycled materials in production. If variance reports illustrate frequent spending overages in areas related to this initiative, it might point to inefficiencies in the recycling process that need to be addressed to reach sustainability targets.
Going further, if the variance analysis shows consistent under-spending in sustainability projects, the company may be underestimating the costs associated with sustainable practices. This insight can lead to a reallocation of budget to meet the original sustainability goals.
Reporting Deviations for Stakeholders
Variance reporting doesn’t only have an internal benefit. By openly sharing your variance reports related to CSR and sustainability initiatives with stakeholders, companies reinforce their commitment to transparency. This proactive method of reporting enhances the company's reputation while demonstrating accountability for not only financials but also the impact on society and the environment.
The role of variance reporting in tracking CSR and sustainability goals underscores the importance of this tool in a company's wider strategic operations. It's not just about financials; it's ensuring the company can conscientiously drive value in all facets of its operations.
Variance Reporting within Different Business Sectors
Variance reporting in a manufacturing industry.
In manufacturing, variance reporting becomes vital in determining productivity levels and cost effectiveness. Variance reports usually compare the standard, budgeted costs of production to actual costs, focusing on direct materials used, direct labor deployed, and other manufacturing overheads. An unfavorable variance in these reports suggests that actual costs surpassed standard costs, indicating possible inefficiencies. On the contrary, a favorable variance denotes lower than estimated costs, signaling higher efficiencies. Manufacturing companies tend to probe into root causes of substantial variances to find rooms for optimizing production and cost management.
Variance Reporting in Retail
The retail sector, unlike manufacturing, mainly utilize variance reports to identify discrepancies between projected and actual sales numbers, inventory costs, and operating expenses. Retail businesses lean on variance reporting for understanding customer behaviors as well as their influence on sales. Also, accurate reporting helps in forecasting demand, managing inventory, and effective planning of marketing promotions. Significant variances, whether positive or negative, prompt retailers to adjust essential business strategies, including product pricing, positioning, and inventory management.
Variance Reporting in Service Industries
Service industries, where revenue generation primarily depends on customer interactions and service provision, variance reporting is predominantly used to compare viable metrics like projected versus actual service hours, hourly wages, and overhead costs. High levels of variance might indicate staffing issues, schedule overruns, or inefficiencies in resource utilization. By analyzing these reports, steps can be taken to fine-tune the services offered, job scheduling, and the staff’s productivity targets. It also aids in better future forecasting and strategic decision making.
As we can perceive, the utilization and effect of variance reporting can differ broadly across industries. However, regardless of the sector, companies utilize these reports to capture key business insights, identify potential inefficiencies, and enhance their decision making.
Interpreting Variance Reports
Interpreting variance reports is an essential process that necessitates a certain set of skills. These skills typically include analytical thinking, a strong understanding of financial concepts, and the ability to extract meaningful business insights from raw data.
Analyzing the data present in variance reports is as much an art as it is a science. One could have a comprehensive understanding of financial principles but still struggle to derive strategic recommendations from a complex variance report. What it requires is the ability to translate financial data into compelling narratives that can influence business decisions. You should be able to identify which variances are substantial, both in absolute dollar terms and in terms of their impact on the budget or forecast.
The divergences shown in a variance report can come in two forms: favorable and unfavorable variances. Favorable variances suggest a more desirable outcome than what was budgeted, while unfavorable variances denote a less desirable outcome. Understanding these distinctions is critical, but it is also essential to comprehend how to respond to each divergences.
Responding to Variance Report
Reacting appropriately to the insights derived from a variance report often necessitates a deep understanding of the report's context. You should not only understand the numbers but also what might have influenced those numbers. Unusual sales activity, fluctuating market conditions, operational inefficiencies, and strategic shifts are all potential contributors to variance. Consequently, it is essential to consider these factors when interpreting variance reports.
Sometimes, random fluctuations can cause variances, while other times, a one-time event might be responsible. Understanding the causes behind the variances can help shape your interpretations and the subsequent actions you take. If a variance was caused by a one-off event, for example, it might not warrant a significant strategy change. Conversely, if the variance is due to an ongoing trend, it could signal a need for a more substantial strategic shift.
To wrap it up, variance report interpretation is more than just understanding the numbers on a page. It's about linking those numbers to real-world events and scenarios and determining how they should influence the company's strategic direction. Having the ability to do this successfully can significantly improve a company's financial performance.
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What Is Variance?
Understanding variance.
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What Is Variance in Statistics? Definition, Formula, and Example
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
The term variance refers to a statistical measurement of the spread between numbers in a data set. More specifically, variance measures how far each number in the set is from the mean (average), and thus from every other number in the set. Variance is often depicted by this symbol: σ 2 . It is used by both analysts and traders to determine volatility and market security.
The square root of the variance is the standard deviation (SD or σ), which helps determine the consistency of an investment’s returns over a period of time.
Key Takeaways
- Variance is a measurement of the spread between numbers in a data set.
- In particular, it measures the degree of dispersion of data around the sample's mean.
- Investors use variance to see how much risk an investment carries and whether it will be profitable.
- Variance is also used in finance to compare the relative performance of each asset in a portfolio to achieve the best asset allocation.
- The square root of the variance is the standard deviation.
Investopedia / Alex Dos Diaz
In statistics, variance measures variability from the average or mean. It is calculated by taking the differences between each number in the data set and the mean, then squaring the differences to make them positive, and finally dividing the sum of the squares by the number of values in the data set. Software like Excel can make this calculation easier .
Variance is calculated by using the following formula:
σ 2 = ∑ i = 1 n ( x i − x ‾ ) 2 N where: x i = Each value in the data set x ‾ = Mean of all values in the data set N = Number of values in the data set \begin{aligned}&\sigma^2 = \frac { \sum_{i = 1} ^ { n } \big (x_i - \overline { x } \big ) ^ 2 }{ N } \\&\textbf{where:} \\&x_i = \text{Each value in the data set} \\&\overline { x } = \text{Mean of all values in the data set} \\&N = \text{Number of values in the data set} \\\end{aligned} σ 2 = N ∑ i = 1 n ( x i − x ) 2 where: x i = Each value in the data set x = Mean of all values in the data set N = Number of values in the data set
You can also use the formula above to calculate the variance in areas other than investments and trading, with some slight alterations. For instance, when calculating a sample variance to estimate a population variance, the denominator of the variance equation becomes N − 1 so that the estimation is unbiased and does not underestimate the population variance.
Advantages and Disadvantages of Variance
Statisticians use variance to see how individual numbers relate to each other within a data set, rather than using broader mathematical techniques such as arranging numbers into quartiles. The advantage of variance is that it treats all deviations from the mean as the same regardless of their direction. The squared deviations cannot sum to zero and give the appearance of no variability at all in the data.
One drawback to variance, though, is that it gives added weight to outliers. These are the numbers far from the mean. Squaring these numbers can skew the data. Another pitfall of using variance is that it is not easily interpreted. Users often employ it primarily to take the square root of its value, which indicates the standard deviation of the data. As noted above, investors can use standard deviation to assess how consistent returns are over time.
In some cases, risk or volatility may be expressed as a standard deviation rather than a variance because the former is often more easily interpreted.
Example of Variance in Finance
Here’s a hypothetical example to demonstrate how variance works. Let’s say returns for stock in Company ABC are 10% in Year 1, 20% in Year 2, and −15% in Year 3. The average of these three returns is 5%. The differences between each return and the average are 5%, 15%, and −20% for each consecutive year.
Squaring these deviations yields 0.25%, 2.25%, and 4.00%, respectively. If we add these squared deviations, we get a total of 6.5%. When you divide the sum of 6.5% by one less the number of returns in the data set, as this is a sample (2 = 3-1), it gives us a variance of 3.25% (0.0325). Taking the square root of the variance yields a standard deviation of 18% (√0.0325 = 0.180) for the returns.
How Do I Calculate Variance?
Follow these steps to compute variance:
- Calculate the mean of the data.
- Find each data point's difference from the mean value.
- Square each of these values.
- Add up all of the squared values.
- Divide this sum of squares by n – 1 (for a sample) or N (for the population).
What Is Variance Used for?
Variance is essentially the degree of spread in a data set about the mean value of that data. It shows the amount of variation that exists among the data points. Visually, the larger the variance, the "fatter" a probability distribution will be. In finance, if something like an investment has a greater variance, it may be interpreted as more risky or volatile.
Why Is Standard Deviation Often Used More Than Variance?
Standard deviation is the square root of variance. It is sometimes more useful since taking the square root removes the units from the analysis. This allows for direct comparisons between different things that may have different units or different magnitudes. For instance, to say that increasing X by one unit increases Y by two standard deviations allows you to understand the relationship between X and Y regardless of what units they are expressed in.
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- How to Calculate Variance | Calculator, Analysis & Examples
How to Calculate Variance | Calculator, Analysis & Examples
Published on January 18, 2023 by Pritha Bhandari . Revised on June 21, 2023.
The variance is a measure of variability . It is calculated by taking the average of squared deviations from the mean.
Variance tells you the degree of spread in your data set. The more spread the data, the larger the variance is in relation to the mean .
Table of contents
Variance vs. standard deviation, population vs. sample variance, variance calculator, steps for calculating the variance by hand, why does variance matter, other interesting articles, frequently asked questions.
The standard deviation is derived from variance and tells you, on average, how far each value lies from the mean. It’s the square root of variance.
Both measures reflect variability in a distribution, but their units differ:
- Standard deviation is expressed in the same units as the original values (e.g., meters).
- Variance is expressed in much larger units (e.g., meters squared)
Since the units of variance are much larger than those of a typical value of a data set, it’s harder to interpret the variance number intuitively. That’s why standard deviation is often preferred as a main measure of variability.
However, the variance is more informative about variability than the standard deviation, and it’s used in making statistical inferences .
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Different formulas are used for calculating variance depending on whether you have data from a whole population or a sample.
Population variance
When you have collected data from every member of the population that you’re interested in, you can get an exact value for population variance.
The population variance formula looks like this:
Sample variance
When you collect data from a sample, the sample variance is used to make estimates or inferences about the population variance.
The sample variance formula looks like this:
With samples, we use n – 1 in the formula because using n would give us a biased estimate that consistently underestimates variability. The sample variance would tend to be lower than the real variance of the population.
Reducing the sample n to n – 1 makes the variance artificially large, giving you an unbiased estimate of variability: it is better to overestimate rather than underestimate variability in samples.
It’s important to note that doing the same thing with the standard deviation formulas doesn’t lead to completely unbiased estimates. Since a square root isn’t a linear operation, like addition or subtraction, the unbiasedness of the sample variance formula doesn’t carry over the sample standard deviation formula.
You can calculate the variance by hand or with the help of our variance calculator below.
The variance is usually calculated automatically by whichever software you use for your statistical analysis. But you can also calculate it by hand to better understand how the formula works.
There are five main steps for finding the variance by hand. We’ll use a small data set of 6 scores to walk through the steps.
Step 1 : Find the mean
To find the mean , add up all the scores, then divide them by the number of scores.
Step 2 : Find each score’s deviation from the mean
Subtract the mean from each score to get the deviations from the mean.
Since x̅ = 50, take away 50 from each score.
Step 3 : Square each deviation from the mean
Multiply each deviation from the mean by itself. This will result in positive numbers.
Step 4 : Find the sum of squares
Add up all of the squared deviations. This is called the sum of squares.
Step 5: Divide the sum of squares by n – 1 or N
Divide the sum of the squares by n – 1 (for a sample ) or N (for a population).
Since we’re working with a sample, we’ll use n – 1, where n = 6.
Variance matters for two main reasons:
- Parametric statistical tests are sensitive to variance.
- Comparing the variance of samples helps you assess group differences.
Homogeneity of variance in statistical tests
Variance is important to consider before performing parametric tests . These tests require equal or similar variances, also called homogeneity of variance or homoscedasticity, when comparing different samples.
Uneven variances between samples result in biased and skewed test results. If you have uneven variances across samples, non-parametric tests are more appropriate.
Using variance to assess group differences
Statistical tests like variance tests or the analysis of variance (ANOVA) use sample variance to assess group differences. They use the variances of the samples to assess whether the populations they come from differ from each other.
- Sample A: Once a week
- Sample B: Once every 3 weeks
- Sample C: Once every 6 weeks
The main idea behind an ANOVA is to compare the variances between groups and variances within groups to see whether the results are best explained by the group differences or by individual differences.
If there’s higher between-group variance relative to within-group variance, then the groups are likely to be different as a result of your treatment. If not, then the results may come from individual differences of sample members instead.
If you want to know more about statistics , methodology , or research bias , make sure to check out some of our other articles with explanations and examples.
- Student’s t table
- Student’s t distribution
- Quartiles & Quantiles
- Measures of central tendency
- Correlation coefficient
Methodology
- Cluster sampling
- Stratified sampling
- Types of interviews
- Cohort study
- Thematic analysis
Research bias
- Implicit bias
- Cognitive bias
- Survivorship bias
- Availability heuristic
- Nonresponse bias
- Regression to the mean
Variability is most commonly measured with the following descriptive statistics :
- Range : the difference between the highest and lowest values
- Interquartile range : the range of the middle half of a distribution
- Standard deviation : average distance from the mean
- Variance : average of squared distances from the mean
Variance is the average squared deviations from the mean, while standard deviation is the square root of this number. Both measures reflect variability in a distribution, but their units differ:
- Standard deviation is expressed in the same units as the original values (e.g., minutes or meters).
- Variance is expressed in much larger units (e.g., meters squared).
Although the units of variance are harder to intuitively understand, variance is important in statistical tests .
Statistical tests such as variance tests or the analysis of variance (ANOVA) use sample variance to assess group differences of populations. They use the variances of the samples to assess whether the populations they come from significantly differ from each other.
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What is a Variance Report?
Home › Accounting › Cost Accounting › What is a Variance Report?
Definition: A variance report is a budget review that states expected results versus actual results. It is a report where deviations are properly identified for informational and decision making purposes.
- What Does Variance Report Mean?
A budget is an estimation of certain variables. It is a tool most frequently employed in finance to forecast probable results of certain business activity. The deviations between a budget and the actual results obtained have to be recognized and dealt with in order to evaluate the business’ results to improve the assumptions and guidelines of future budgets and to make timely decisions.
A variance report is a written document, often presented in an excel sheet or a power point presentation, where the difference between the budget and the actual results (normally provided in a financial statement) are illustrated. These deviations are presented in absolute terms (numbers) and relative terms (percents). Since the budget normally includes many rows with different income and expense’s categories, like rent, office supplies and others, these variations should also be calculated on a per-row basis.
A negative variation means that actual results underperformed the budget and a positive variation means that the budget was exceeded. These reports are normally presented to business owners and executives for them to have enough information to adjust the course of actions accordingly.
Sheets Co. is a company that provides office supplies for businesses and individuals across the country through its 250 store locations. The Board of Directors is currently reviewing the last quarter’s variance report, drafted by the Finance Department.
The budget drafted for the last quarter stated expected revenues as $96,590,000, gross income as $29,420,000 and operating income as $12,592,000. The actual results were revenues of $102,212,000 (a 5,622,00 positive difference or 6% more than expected), gross income was 28,214,000 (a 1,206,000 negative difference or 4% less than expected) and operating income was 15,218,000 (a 2,626,000 positive difference or 21% more than expected).
This report will help the Board make decisions about the course of the business to increase results over time.
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The Guide to Creating a Variance Analysis Report in Excel
What is Variance Analysis?
Variance analysis is a financial analysis technique used to compare actual financial performance to planned or budgeted performance. It involves analyzing the difference between the actual cost or revenue incurred during a period and the budgeted or expected cost or revenue for that same period.
The objective of variance analysis is to identify the causes of differences between the actual and budgeted performance, and to use this information to make adjustments to the budget or to the business operations in order to improve future performance.
Variance analysis is commonly used in financial management, accounting, and cost control to monitor and manage expenses, revenue, and profits. By identifying and analyzing variances, managers can make informed decisions about where to allocate resources, how to adjust operations, and how to optimize profits.
Why conduct a variance analysis report?
There are several big advantages to conducting a variance analysis report, especially in Excel:
- It helps identify potential problems, specifically where the actual performance differs significantly from the budget.
- A variance analysis report provides valuable insights into business performance by identifying the underlying causes of the variances.
- It improves budgeting accuracy by analyzing the variances which allows managers to gain more control and understanding of the factors affecting performance as they come up.
- Variance analysis enhances communication by providing a common language for discussing financial performance across the organization. This can help to improve communication and collaboration between the different departments.
How to use variance analysis in Excel
Variance analysis can be performed in Excel using a variety of techniques. Here’s a step-by-step guide:
- Enter your actual and budgeted values into separate columns in an Excel spreadsheet.
- Calculate the difference between the actual and budgeted values by subtracting the budgeted values from the actual values.
- Calculate the percentage variance by dividing the difference by the budgeted values and multiplying by 100. This will give you the percentage difference between the actual and budgeted values.
- Create a pivot table to summarize the data and calculate the total variance and percentage variance for each category or department.
- Create a variance analysis chart by selecting the data range and inserting a chart. Choose a chart type that best illustrates the variance data, such as a column chart or a stacked column chart.
- Format the chart to clearly show the actual and budgeted values, as well as the variance and percentage variance for each category or department.
- Analyze the chart to identify areas where the actual values are significantly different from the budgeted values. Use this information to make informed decisions about resource allocation and business operations.
There are also many built-in functions and formulas in Excel that can be used to perform more complex variance analysis, such as standard deviation and variance calculations. By learning and utilizing these functions, you can conduct more sophisticated variance analysis to gain deeper insights into your business performance.
How to Vertically Align Variance Amounts With Budgets and Actuals
To vertically align variance amounts with budgets and actuals in Excel, follow this guide:
- Follow steps 1-3 of the previous list.
- Insert a new column next to the budgeted and actual columns to hold the variance amounts.
- Enter a formula in the first cell of the variance column that subtracts the budgeted value from the actual value. For example, if your budgeted values are in column B and your actual values are in column C, you could enter the following formula in cell D2: =C2-B2
- Copy the formula down the entire variance column so that it is applied to all rows in the table.
- Highlight the budgeted and actual columns, as well as the variance column.
- Click on the “Home” tab and select the “Alignment” group.
- Click on the “Align Top” or “Align Bottom” button, depending on whether you want the budgeted or actual values to be at the top of the cell and the variance amount to be aligned with it.
- The budgeted or actual value will now be aligned at the top or bottom of the cell, and the variance amount will be vertically aligned with it.
By vertically aligning the variance amounts with the budgeted and actual values, you can more easily compare the differences between the two values and identify areas where performance is significantly different from expectations. This can help you to make informed decisions about resource allocation and business operations to improve your financial performance all while presenting it to management in a clear and easy way.
Common Problems in Variance Analysis Reporting
1. delayed data.
If there is a delay in the data collection from any department in the company, this can create some problems. The finance team will send an outdated report to your management, from which they’ll analyze and then make decisions that aren’t completely accurate. Therefore, it’s important for the company to conduct the month end close as fast as possible in order to make sure all of the reports are up to date and accurate before making decisions.
2. Siloed Data Sources
Without data integration and data consistency, you can’t clearly identify the causes behind the high variances. Although the data might all be there, but without a single source of truth, the finance team cannot feel confident in their numbers. Integrate your data sources—such as your ERPs, GLs and HRISs—before you can create a complete variance analysis report to get the full picture.
3. Historical Budget Logic and Comparison
The last problem involves historical comparisons. Even if you have one source of data and are confident in your numbers, if you don’t know how previous budgets were set, you can’t deliver a report with any value to your management. The variance analysis report is directly related to the budget, so without historical budgeting accuracy, the variance report doesn’t mean much from a company’s health standpoint. Looking at and understanding the progression of budgets and variances will help you create a historically informed report which your management can trust.
Conducting variance analysis reports in Excel is a great way to check if the company is on target in comparison to the budgets and forecasts. However without data in one source of truth that you can trust, the reports will be inaccurate and not trustworthy. Using tools such as Excel based FP&A software is a great way to take care of these issues and conduct quick and accurate variance analysis inside the familiarity of Excel. Last but not least, the variance analysis is meant to provoke questions from management, therefore having clear and simple data visualization tools will help non-finance management understand the data.
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Statistics Made Easy
A Simple Explanation of How to Interpret Variance
In statistics, we are often interested in understanding how “spread out” values are in a dataset. To measure this, we often use the following measures of dispersion :
- The range: the difference between the largest and smallest value in a dataset.
- The interquartile range: the difference between the first quartile and the third quartile in a dataset (quartiles are simply values that split up a dataset into four equal parts).
- The standard deviation: a way to measure the typical distance that values are from the mean.
- The variance: the standard deviation squared.
Out of these four measures, the variance tends to be the one that is the hardest to understand intuitively. This post aims to provide a simple explanation of the variance.
Understanding Standard Deviation
Before we can understand the variance, we first need to understand the standard deviation , typically denoted as σ .
The formula to calculate the standard deviation is:
σ = √(Σ (x i – μ) 2 / N)
where μ is the population mean, x i is the i th element from the population, N is the population size, and Σ is just a fancy symbol that means “sum.”
In practice, you will rarely need to calculate the standard deviation by hand; instead, you can use statistical software or a calculator.
At its most basic level, the standard deviation tells us how spread out the data values are in a dataset. To illustrate this, consider the following three datasets along with their corresponding standard deviations:
[5, 5, 5] standard deviation = 0 (no spread at all)
[3, 5, 7] standard deviation = 1.63 (some spread)
[1, 5, 99] standard deviation = 45.28 (a lot of spread)
The term “standard deviation” can be understood by looking at the two words that make it up:
- “deviation” – this refers to the distance from the mean.
- “standard” – this refers to the “standard” or “typical”distance that a value is from the mean.
Once you understand standard deviation, it’s much easier to understand variance.
Understanding Variance
The variance, typically denoted as σ 2 , is simply the standard deviation squared. The formula to find the variance of a dataset is:
σ 2 = Σ (x i – μ) 2 / N
So, if the standard deviation of a dataset is 8, then the variation would be 8 2 = 64.
Or, if the standard deviation of a dataset is 10, then the variation would be 10 2 = 100.
Or, if the standard deviation of a dataset is 3.7, then the variation would be 3.7 2 = 13.69.
The more spread out the values are in a dataset, the higher the variance. To illustrate this, consider the following three datasets along with their corresponding variances:
[5, 5, 5] variance = 0 (no spread at all)
[3, 5, 7] variance = 2.67 (some spread)
[1, 5, 99] variance = 2,050.67 (a lot of spread)
When Would You use Variance Instead of Standard Deviation?
After reading the above explanations for standard deviation and variance, you might be wondering when you would ever use the variance instead of the standard deviation to describe a dataset.
After all, the standard deviation tells us the average distance that a value lies from the mean while the variance tells us the square of this value. It would seem that the standard deviation is much easier to understand and interpret.
In reality, you will almost always use the standard deviation to describe how spread out the values are in a dataset.
However, the variance can be useful when you’re using a technique like ANOVA or Regression and you’re trying to explain the total variance in a model due to specific factors.
For example, you might want to understand how much variance in test scores can be explained by IQ and how much variance can be explained by hours studied.
If 36% of the variation is due to IQ and 64% is due to hours studied, that’s easy to understand. But if we use the standard deviations of 6 and 8, that’s much less intuitive and doesn’t make much sense in the context of the problem.
Another case in which the variance may be better to use than the standard deviation is when you’re doing theoretical statistical work.
In this case, it’s much easier to use the variance when doing calculations since you don’t have to use a square root sign.
Additional Resources
The following tutorials provide additional information about variance:
Sample Variance vs. Population Variance: What’s the Difference? How to Calculate Sample & Population Variance in Excel
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How to maximize the value of your variance report
4 minute read
Like any successful business, you set aside time each year to create your annual budget and define your targets for the following year. Then, as you move through the year, you’re regularly measuring the business’s performance against that baseline. This exercise helps you gauge how the business is doing.
Each month, you’re checking to see which areas of the business are performing as expected and which areas need more attention. By doing this, you’re determining where your team needs to focus its energy.
These comparisons that you’re using are variance reports. A well-designed variance report is among the most useful tools available in finance and accounting. Using variance reports can help you get an edge on your competitors by helping stakeholders quickly decide which actions are necessary to drive the business.
What is a variance report?
A variance report is a report showing a comparison between two sets of values. The objective of the variance report is to highlight areas with major gaps to drive action on the right areas. Very often in business, the variance report focuses on the comparison between budget and actuals , although it can be used for any comparison.
An efficient method of improving control over a business’s financials, variance reports are some of the most useful, informative tools of managerial accounting. They briefly highlight where a company has the biggest gaps and helps the team direct its attention to the right places.
Variance reports can also serve as a sort of early-warning system. Drawing attention to areas that are not performing can help you quickly address problems before they become major cash flow issues .
Interpreting variance report results
As a key tool for helping companies stay on track and more quickly achieve their goals, variances should be pursued in the order of their importance. When determining which variances to tackle first, choose either the most significant or the most easily addressed.
Because it’s uncommon to have areas with no variance, it’s crucial to differentiate between significant and insignificant differences. Often, the biggest areas in need of focus don’t have the largest percentage variance but rather the largest magnitude.
Setting up your variance reports to automatically identify positive and negative variances helps your team work more efficiently. Then, no energy is wasted manually highlighting good or bad variances, or determining which are most important.
For example : A 75% negative variance on a small category (say, insurance for $500) is far less critical than a 10% variance on cost of goods sold with a base value of $25,000.
As variances can go in both directions, even positive variances should be analyzed and understood. It helps to know why things are going well, both to be sure that it’s not an error or timing issue and to increase the chances of repeating it.
Positive vs. negative variances
In almost all cases, there are variances in both directions . Although in sum the various effects may net to zero, it’s important to understand your variances for all major P&L blocks.
Positive variances are normally favorable for the company. These could be:
- Positive revenue variance driven by extra sales
- Lower production costs driven by higher efficiency
- General improvements caused by an event or period going better than originally planned
On the other side, negative variances are just the opposite and driven by unfavorable developments:
- Low sales driven by lower than anticipated demand
- Higher material costs (caused by lower volumes or even overly aggressive budgeting)
- Inefficiencies in production driving labor costs up
Common types of variances
When designing your variance report, it’s helpful to break your major P&L lines down to subcategories . This keeps attention focused on the critical areas, without showing every single reporting line.
Here are a few common types of variances.
Price variance
Perhaps obviously so, this category refers to variances vs. your baseline price of material. These variances can be driven by several factors.
For example:
- 1. Raw material prices may have changed vs. your standard price or what was considered in your budget
- 2. Discounts given for higher purchasing volumes could drive material cost down
- 3. Alternative suppliers or substitute materials may be necessary due to market limitations or unexpected tariffs
Usage variance
Usage variances come from differences in actual material usage compared with the expected amounts.
A few examples of factors driving usage variance could be:
- 1. Higher scrap rates than considered in the budget
- 2. Machine inefficiencies negatively affecting yield
- 3. Design changes requiring less material consumption or generating less waste causing positive usage variances
Labor variance
This refers to deviations in the cost of labor when compared to the standards. These variances can be driven both by changes in labor rates and the amount of labor used.
There are three main factors that can affect your Labor Variance:
- 1. Actual wages are higher (or lower) than the standard you assumed in your baseline 2. Higher efficiency leads to increased output for the same amount of hours, creating a positive variance ( For example: your standard calculation may have assumed a 10 pieces per person hour. Fortunately, your employees are extremely efficient and are producing 12 per person hour on average.) 3. Higher or lower actual hours compared with the standard
Overhead spending variance
This category can be a collector for other factors not fitting into the other categories. In a manufacturing environment especially, they can be costs not specifically attributable to certain manufacturing processes .
Depending on the specific company, Overhead spending variance can refer to effects from these factors:
- Higher usage of supplies or electricity
- Excessive overhead spending caused by higher sales or admin costs
- Equipment repair
- Late delivery penalties or expedited freight charges
How to create a variance report
With Jirav you can create customized variance reporting . As the user, you decide which variances are shown positively or negatively.
Because each company is different, when building your own variance reports it’s critical to define your own materiality concepts. That could mean that you only want to highlight variances greater than 10% or $5,000.
With Jirav you can also compare many different figures and categories. For example, you can go with the standard actual vs. budget variance report.
However, if your forecast provides a more relevant baseline , why not create an additional actual vs. forecast report ? It’s even possible to compare actual vs. actual from a previous period.
The important thing is that the reports are easy to read and allow the intended audience to quickly find the key points. This is where showing percentage (%) variances, standard templates and color-coding is extremely helpful. By making your template as easy to understand as possible, you reduce the friction necessary to drive action.
How can you improve budget variance?
In order to reduce budget variances, you first need to know where those variances are and what’s driving them. Automating the process of generating and distributing your variance reports allows you to focus on more important things than maintaining spreadsheets.
While it’s nice to see your variances, the actual intent behind variance reporting is to drive action. But the reports can only highlight the gaps, your team needs to address the root causes in order to improve your budget variances going forward.
Jirav is a powerful tool, designed to make all things finance easier. You can even automate your variance analysis with Jirav. Then you can focus your energy on driving the actions necessary to improve your budget variances.
Check out how Jirav can help .
Kelli Blystone
Kelli is the Senior Content Strategist for Jirav.
December 9, 2022
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What is a variance report?
A variance report is a financial report that compares the actual financial performance of a company with its budgeted or forecasted performance. It highlights variances, or differences, between the two, which can be used to identify areas of concern or opportunity.
In a variance report, positive variances (where actual results are better than expected) and negative variances (where actual results are worse than expected) are typically highlighted. Variance reporting can help management understand why the company is over or under-performing against its plan and take corrective action if necessary. It's an important tool for budgeting, financial management, and strategic planning.
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The Importance of Accurate Variance Reporting
At a Glance
Main Takeaway
Variance reports are used by businesses and organizations to monitor their financial performance and identify areas where they are over or underperforming. Accurate variance reporting is essential for companies to make adjustments to improve the bottom line.
Learn more about the importance of accurate variance reporting and how Windes Financial Planning & Analysis Services can help you improve your business’s financials in 2024.
What is a Variance Report?
A variance report is an analysis that compares two sets of values: actual financial performance and budgeted or expected performance. Businesses use variance reports to identify revenue, expenses, and profitability performance gaps. They also highlight significant differences or variances between real-time results and a projected budget.
Variance reporting is essential for businesses because it helps direct focus on the areas needing the most attention. It serves as an early warning system when one area, such as labor costs, is not aligning with a company’s projections, allowing accounting departments to address the issues and improve cash flow.
Understanding Variance Report Results
When using variance reports for your business, it is helpful to set up reports to identify positive and negative variances. This structure streamlines the interpretation process, letting your financial team quickly identify the most critical areas.
Your team’s focus should be on variances with the most significant magnitude, not necessarily the largest percentage variance. For instance, your team runs a variance report that shows a 70% negative variance ($400) in a small category like insurance and a 15% variance ($20,000) in a more significant category like the cost of goods sold. In this case, the second variance should be the immediate focus.
Positive Variances
Positive variances are typically favorable and indicate where the company is performing well. These variances include financials such as general improvements due to a high-earning period, lower production costs due to higher efficiency, and increased revenue due to extra sales.
Negative Variances
Negative variances are areas where the company is not performing as projected and can indicate internal or external issues causing unfavorable results. These variances include poor sales numbers, increased material costs, or high labor costs due to production inefficiencies.
Common Variance Types
A well-designed variance report sub-categorizes a business’s profits and losses (P&L) to highlight specific performance areas. By breaking up the P&L lines into a few major subcategories, you can quickly see how a critical area aligns with your goals.
You can include the following variances in your financial report:
Usage Variance
Usage variance refers to the differences in the materials your company uses versus expected usage amounts. In variance reporting, usage variance is typically calculated for materials, labor, or overhead costs. It is an essential metric for businesses because it can indicate whether a company is using its resources as efficiently as possible. Factors that might influence usage variance include:
- Budget considerations versus higher scrap rates
- Machine inefficiencies that negatively affect your output
- Changes to operations that create positive usage variances due to using less material
Price Variance
Price variance refers to your baseline material prices versus variances. Price variance is an essential calculation for businesses because it shows whether a company is paying more or less than it had budgeted or planned for a particular resource. These variances are influenced by multiple factors, such as:
- Raw material price changes vs. the standard price or what your company budgeted for
- Lower materials costs due to discounts for purchasing a higher volume
- Price differences due to alternative suppliers or materials due to supply chain issues or tariffs
Overhead Spending Variance
Overhead spending variance is a miscellaneous category for elements that do not fall under your other subcategories and can include factors such as:
- Overhead expense variances such as higher electricity or supply usage that do not align with your budget
- Unplanned equipment repair costs
- Extra fees or charges, such as freight costs not included in the original budget
Labor Variance
Labor variance reflects the differences in the cost of labor when compared to your company’s benchmarks or industry standards. The amount of labor used and changes in labor rates can affect this variance, including instances such as:
- Positive variance created by higher efficiency (increased output for the same labor hours)
- Wages paid are higher or lower than your standard baseline
- Employee hours are higher or lower than your benchmark
How to Create a Variance Report
To create a variance report, you gather and analyze financial data from your business or organization. This can include financial performance data, such as revenue, expenses, and profitability, as well as budgeted or forecasted data.
You will then need to calculate the variance for each metric by subtracting the budget or forecast from the actual results. For example, if budgeted revenue was $100,000 and actual revenue was $90,000, the variance would be negative $10,000.
Your accounting team will use the variance data to create a report that compares actual results to the budget or forecast. Include a summary of the variances and detailed information on each financial metric.
Not getting variance reports? We can help. By partnering with Windes Advisory Services , you will have access to skilled accounting professionals who utilize specialized financial planning and analysis (FP&A) tools designed to help your organization create budgets, forecasts, and financial reports. Our experts will produce easy-to-understand visual reports so you can see your company’s revenue and perform expense forecasting and variance analysis.
Our FP&A Services provide a historical review of past performance, plus additional analysis and insights into the present and foresight for what’s next. See below for additional details on the data, analysis, and insights we can assist with.
Windes Advanced FP&A services include:
- Financial Reports: Income Statement, Balance Sheet, Statement of Cash Flows
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Improve Your Budget Variance with Windes
Whether your existing variance reports show significant gaps in financial performance or you want to create variance reports from the ground up, Windes can help.
Contact our team today to learn more about our FP&A Services and how we can help you increase your organization’s cash flow and improve your bottom line.
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Mon Feb 19 2024
What is a variance report and how to create one.
Want to know what businesses use to keep track of their performance? Step into the world of variance reports! A variance report is an essential tool that helps compare planned outcomes with actual results to show how things went well and what things went undesired. However, do not worry; making one is not rocket science! Well, some companies also work with the Performance Marketing Software to track everything.
In this blog post, we will find the importance of variance reports and advise you on making one of your own. Whether you are a business owner, manager, or just a curious financial enthusiast, proficiency in variance reporting can spare you the pressure of choosing what's right. Let's dive in!
What is variance reporting?
A variance report is a document that analyzes the variance of actuals versus planned or forecasted values. It focuses on the differences or variances between the two, often measured in financial numbers, operational metrics, or project milestones. Variance reports are used in business, finance, and project management. It is used to monitor performance, pinpoint areas of improvement or concern, and make informed decisions.
A variance report for finance can compare actual costs and revenues with corresponding budgeted amounts. These reports will also show management where the organization performs better or worse than planned. Moreover, variance reports can analyze differences in production costs, efficiency levels, or quality standards. In project management, variance reports compare progress, timelines, and costs against the planned schedule and budget.
Variances reports explain significant variances, giving the reason for deviations from the plan. Management can take corrective action to deal with drastic, unfavorable variances or capitalize on favorable ones. It helps the organization meet its objectives more.
Why is variance reporting important?
Variance reporting is important because it helps businesses see the difference between predicted or planned outcomes and what happened. By comparing the budget or forecast to actual performance, variance reports point out where things went well or where there were problems. This information helps managers recognize achievements and deal with issues immediately. It will allow them to make educated decisions.
For example, if expenses are higher than planned, managers can investigate them and undertake actions to recover costs. Therefore, if revenues exceed projections, they would identify and replicate the driving factors across other areas. Variance reporting makes it possible for businesses to know where they stand. It will make efficient use of resources and enhance all-round performance.
When is variance reporting used?
Companies present variance reporting to show different financial figures planned, budgeted, and actual results. It provides a way of identifying discrepancies between the expected and actual outcomes. This process is usually done on a recurring basis for the tracking of financial performance and to ensure accountability.
Variance reporting is important in bringing out the areas in which targets were not reached and also showing where unplanned occurrences happened. The analysis of these variations helps businesses to make appropriate decisions, alter plans, and enhance financial governance in general. It is essential to managers, executives, and stakeholders since it is a critical tool for performance assessment, informed decision-making, and guiding an organization toward its financial goals.
How to Make a Variance Report?
The process of developing a comprehensive variance report is structured in such a way that it provides useful information concerning a company's financial situation. Let's walk through the six key steps: Let's walk through the six key steps:
Step 1: Data Collection
Start by collecting all necessary financial data, such as the budgeted and actual figures. This includes what has been budgeted (planned) compared to what was spent or earned.
Step 2: Template Setup
The template should be designed using spreadsheet software such as Excel to contain dedicated columns for budgeted figures, actual figures, and variances. This serves as a visual aid for comparison purposes.
Step 3: Inputting Data
Please ensure you enter the amounts correctly in the budgeted and actual columns on the template. The data input should be precise for an accurate analysis.
Step 4: Variance Calculation
Get the variances for each item by subtracting the budgeted value from the actual value. The positive variances mean the actual expenditure or earnings exceed the plan.
Step 5: Results Analysis
Analyze the variances, emphasizing the significant deviations. These considerable differences pinpoint the areas that need tackling. Dive into the underlying causes of these differences.
Step 6: Explanatory Notes
Prepare explanatory notes for each variance of the significant scale, explaining its contributing factors. These may be errors due to costs that did not come within budget, changes in the market situation, or calculation mistakes.
A good and comprehensive variance report can be generated when following this procedure carefully, as it helps with informed decision-making and financial management.
Ending Note
In conclusion, variance reports are important tools for companies to compare budgeted figures with actual financial results. Through the structured process given, composed of data gathering, analysis, and explanatory notes, companies can discover key information about their financial performance. The use of variance reports is a tool for informed decisions, proactive adjustments, and, hence, effective financial management.
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A variance report is one of the most commonly used accounting tools. It is essentially the difference between the budgeted amount and the actual, expense or revenue. A variance report highlights two separate values and the extent of difference between the two.
The variance report is a written document, often in the form of an Excel spreadsheet, that shows the business owner and other stakeholders the variance in revenue numbers or expenses over a specific period. Why is variance reporting important? Capturing and understanding variances are crucial to controlling future costs and maximizing profit.
A variance report is a document that explains the differences between what you planned for and what actually occurred in a project. It includes information on the project's budgeted or expected outcomes, final costs or results, variance, and reasons for the variance. Learn how to write a variance report for project management with tips and examples.
A variance report is a financial tool used to measure the difference between planned (budgeted) and actual financial performance. This report highlights where you spent more or less than you expected.
Cost overrun definition A variance report compares actual to expected results. It allows management to gauge the performance of an organization against expectations.
A variance report is a written document that shows the deviations between the projected income and expenses listed on the budget and the actual numbers reported at the end of the period. The variance report lists the difference for each line item as both a number and a percentage.
Reports November 18, 2021 You're a business owner, and you want to know how your company is doing. A variance report can help you figure that out! It's an accounting report that shows the difference between expected results and actual results. In other words, it tells you whether or not your budget was met for a specific period of time.
A variance report is a planning document that compares budgeted amounts for expenses and revenue to actual results. This type of reporting can also show deviations between budgeted and forecasted results. Conducting variance analysis can help your company take corrective measures when budgeting.
A variance report is a document that compares planned financial outcomes with the actual financial outcome. In other words: a variance report compares what was supposed to happen with what happened. Usually, variance reports are used to analyze the difference between budgets and actual performance.
#1. Predetermined Variance Reports #2. Ad hoc Variance Reports How to Write a Variance Report Step #1: Gather Data Step #2: Input the Actual Data Step#3: Contrast Actual with Budgeted Step #4: Examine the Results How to Interpret Variance Report Results What are the Characteristics of a Good Variance Report? When Should Variance Reporting Be Used?
A variance report is a financial document that compares projected costs and revenues to the actual amounts after a period of time, identifying any discrepancies or "variances" between the two. It serves as a pivotal tool for businesses in budgeting, financial analysis, and cost control. Importance of Variance Report in Financial Management
A variance report is a written document that compares budgeted items with actual figures, commonly used in sales, finance, and marketing departments. Different types of variances exist, including purchase price, overhead, sales, labor, and usage variance, each with its unique interpretation.
Variance reporting is a standard procedure in financial accounting and budget management that involves comparing actual financial performance with budgeted or projected figures.
A variance report (VR) is a document that businesses use to compare actual financial outcomes with planned financial outcomes. The difference between these two values is the variance and many professionals use VRs to understand how their business is performing in comparison to projections.
Variance is a measurement of the spread between numbers in a data set. The variance measures how far each number in the set is from the mean. Variance is calculated by taking the differences ...
Variance is a measure of variability that is calculated by taking the average of squared deviations from the mean. It tells you the degree of spread in your data set and is used in statistical tests and analyses. Learn how to calculate variance by hand or with a calculator, and see the difference between population and sample variance, and why variance matters for statistical inference.
A variance report is a budget review that states expected results versus actual results. It is a report where deviations are properly identified for informational and decision making purposes. Learn how to calculate and present variance reports with an example from a company that sells office supplies.
The variance analysis report is directly related to the budget, so without historical budgeting accuracy, the variance report doesn't mean much from a company's health standpoint. Looking at and understanding the progression of budgets and variances will help you create a historically informed report which your management can trust.
The variance, typically denoted as σ2, is simply the standard deviation squared. The formula to find the variance of a dataset is: σ2 = Σ (xi - μ)2 / N. where μ is the population mean, xi is the ith element from the population, N is the population size, and Σ is just a fancy symbol that means "sum.". So, if the standard deviation of ...
What is a variance report? A variance report is a report showing a comparison between two sets of values. The objective of the variance report is to highlight areas with major gaps to drive action on the right areas. Very often in business, the variance report focuses on the comparison between budget and actuals, although it can be used for any ...
A variance report is a financial report that compares the actual financial performance of a company with its budgeted or forecasted performance. It highlights variances, or differences, between the two, which can be used to identify areas of concern or opportunity.
A variance report is an analysis that compares two sets of values: actual financial performance to budgeted or expected performance. Businesses use variance reports to identify revenue, expenses, and profitability performance gaps. Variance reports are also used to highlight significant differences or variances between real-time results and a ...
A variance report is a document that analyzes the variance of actuals versus planned or forecasted values. It focuses on the differences or variances between the two, often measured in financial numbers, operational metrics, or project milestones.
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Results showed that when model uncertainty is known, significant, and unevenly distributed amongst the controls, the minimum-variance allocator more often achieves the intended forces and moments on the vehicle in comparison to other allocators, which can lead to increased performance, reliability, and safety during flight tests.