Accounting technology / Glossary / Variance analysis (budget vs actual)

What is variance analysis?

Definition

Variance analysis is comparing a company's actual results with its budget, forecast or prior period and explaining the differences. Each line of the profit and loss, and often the balance sheet and cash flow, shows the variance in money and percentage, with commentary on the cause, so managers can see what changed and decide what to do.

Also calledbudget vs actualBvAbudget variance analysis

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Compares: Actual vs budget or forecast
Breakdowns: Price, volume, mix, timing
Category: FP&A and forecasting

How variance analysis works

After each month-end close, actuals from the ledger are set against the budget and the latest forecast. Variances are labelled favourable or adverse and filtered by a threshold, such as both a set amount and a percentage, so effort goes to the ones that matter. Each significant variance is then broken down: sales into price, volume and mix; costs into rate and usage; and differences that are only timing, such as a cost booked a month later than planned. Budget holders supply the explanation and FP&A turns it into commentary for the management pack. Flux analysis on the balance sheet, which explains movements from one period to the next, is the accounting team's equivalent during the close. Abacum, Pigment, Anaplan and Aleph pull actuals automatically; Numeric flags unusual movements during the close.

Common questions

What is the difference between a favourable and an adverse variance?+

A favourable variance improves profit compared with plan, such as higher revenue or lower cost. An adverse variance reduces it. A favourable cost variance can still be a problem if it means planned work was not done.

What is a price and volume variance?+

A split of a revenue or cost variance into the part caused by a different price or rate and the part caused by a different quantity. It shows, for example, whether revenue missed plan because fewer units sold or because they sold for less.

What is the difference between variance analysis and flux analysis?+

Variance analysis compares actuals with a plan. Flux analysis compares balances with the previous period, without reference to a plan, and is used in the close to spot errors and explain movements.