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The Importance of Variance Analysis

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This critical topic is too often taught to only a handful of students—or neglected in the b-school curriculum altogether.

Variance analysis is an essential tool for business graduates to have in their toolkits as they enter the workforce. Over our decades of experience in executive education, we’ve observed that managers across all industries and functions use variance analysis to measure the ability of their organizations to meet their commitments.

Because variance analysis is such a powerful risk management tool, there is a strong case for including it in the finance portion of any MBA curriculum. Yet fewer than half of finance professors believe they should be teaching this subject; they view it as a topic more typically taught in accounting classes. At the same time, in practice, variance analysis is such a cross-functional tool that it could be taught throughout the business school curriculum—but it’s not. We perceive a worrisome disconnect between the way variance analysis is taught and the way it is used in real life.

Variance Analysis and Its Applications

There are three periods in the life of a business plan: prior period to plan, plan to actual, and prior period to actual. For instance, if a business plan is being formulated for 2019, the “prior period” would be 2018, the “plan to actual” would be the budget for 2019, and the “prior period to actual” would be what really happens in 2019. These three stages are also referred to as planning, meeting commitments, and growth.

For each of these periods, variance analysis looks at the deviations between the targeted objective and the actual outcome. The most common variances are found in price, volume, cost, and productivity. When executives conduct an operational review, they will need to explain why there were positive or negative variances in any of these areas. For instance, did the company miss a target because it lost an anticipated national account or failed to lock in a price contract due to competitive pressure?

Executives who understand variances will improve their risk management, make better decisions, and be more likely to meet commitments. In the process, they’ll produce outcomes that can give an organization a real competitive advantage and, ultimately, create shareholder value.

Most businesses apply variance analysis at the operating income level to determine what they projected and what they achieved. The variances usually are displayed in the form of floating bar charts—also known as walk, bridge, or waterfall charts. These graphics are often used in internal corporate documents as well as in investor-facing documents such as quarterly earnings presentations.

While variance analysis can be applied in many functional areas, it is used most often in finance-related fields. Yet, the majority of finance programs at both the graduate and undergraduate levels don’t cover it at all. We surveyed finance faculty in 2013 and accounting faculty in 2017 to determine how they teach and use variance analysis. Among other things, we learned that:

  • More than 80 percent of accounting faculty believe that variance analysis is important to a finance career, and they are far more likely to teach it than their finance faculty colleagues.
  • Only 59 percent of finance faculty and 48 percent of accounting faculty are familiar with examples of walk charts from real-world companies. Yet these visual portrayals of operating margin variances are commonplace in quarterly earnings presentations and readily found on investor relations websites.

Because universities mostly fail to teach this important topic, corporate educators have been left to fill the learning gap. Many global organizations, in fact, make variance analysis a key subject in their development programs for entry-level financial professionals.

The University Response

We believe it’s critical for universities to better align their curricula with the skills that today’s employers seek in the graduates they hire. Not only do we think variance analysis should be included in the business curriculum, but we could even make an argument for running it as a capstone business course. We offer these suggestions for ways that faculty could integrate this powerful tool across the business school program:

  • Both accounting and finance faculty should, as much as is practical, incorporate variance analysis into their classes, particularly focusing on financial planning and analysis. We acknowledge that a dearth of corporate finance texts on the topic will make this a challenge for finance professors. The two of us employ teaching materials in our graduate business and undergraduate finance classes based on experience in the corporate world, and we would be glad to share them with others.
  • Faculty who use case studies should always include a case specific to variance analysis tools. Students who pursue careers in corporate finance will almost certainly be required to use such tools, particularly as data and predictive analytics applications are enhanced to improve forecasting accuracy. Two sources of such case studies are TRI Corporation and Harvard Business Publishing.
  • Professors can introduce students to real-world applications of variance analysis by showing how it is used in investor relations (IR) pitches. As instructors, the two of us routinely search IR sites for applications of variance analysis. We specifically look for operating margin variance walks (floating bars, brick charts) for visual applications that can make the topic come to life for students. Here’s an example from Ingersoll Rand:

Ingersoll Rand variance analysis chart

  • Faculty from accounting and finance programs should collaborate on when, where, and how to teach variance analysis. At the very least, this will ensure that students gain an understanding of the topic from either a finance or an accounting perspective, but the ideal would be for them to benefit from both perspectives for a holistic understanding. At Fairfield University, accounting programs introduce students to the theory of variance analysis. Then finance programs take an operational and cross-functional approach that addresses planning, meeting commitments, and growth.
  • Both accounting and finance faculty should help finance majors understand variance analysis from a practitioner’s standpoint. Discussions about pricing, supply chain, manufacturing costs, risk management, and inflation and deflation around cost inputs can help students grasp the necessity of making trade-offs and balancing short-term and long-term business goals. To make sure students understand the practitioner’s viewpoint, we use corporate business simulations that are more operationally focused, as opposed to being academic in tone.
  • To extend the topic to all majors, not just finance and accounting students, faculty from disciplines such as strategy and operations could also incorporate variance analysis into their classes. For instance, if they use business simulations for their capstone courses, they could add a component that covers variance analysis. At Fairfield, we use a variety of competitive business simulations from the corporate world.
  • Finally, professors can bring in guest speakers from almost any business functional area and ask them to explain, as part of their presentations, how variance analysis is relevant in their fields. As an example, we often have senior finance executives from Stanley Black & Decker—a company known well-known for its ability to grow and meet its commitments via variance analysis—present to our graduate program. We tap other companies from Fairfield County as well.

In the graduate classes we teach at Fairfield University, we have always tried to connect theory with practice. And we’ve long believed that creating a culture of meeting and exceeding commitments requires aligning interaction across functions in the workplace. With this article, we hope that, at the very least, we can start a larger discussion about the need for cross-disciplinary teaching of variance analysis.

  For more about variance analysis materials, contact us at  [email protected]  or  [email protected] .

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  • What is Variance Analysis: Types, E...

What is Variance Analysis: Types, Examples and Formula

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Table of Content

Key takeaways.

  • Variance analysis compares the actual vs expected cash flows and keeps track of the financial metrics of your businesses. 
  • Different variance analysis formula measures specific financial metrics, providing insights into specific aspects of performance. 
  • Leveraging AI capabilities to analyze differences helps stakeholders achieve a better understanding of the finances and make well-informed decisions.

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Introduction

In any business, having a grasp of projected cashflows, and available cash is crucial for daily financial operations. Enterprises utilize variance to measure the disparity between expected and actual cash flow.

Variance analysis involves assessing the reasons for the variances and understanding their impact on financial performance. In this ever-changing global economy, variance is an important metric for enterprises to track more than ever as it helps understand how accurate your cash forecasts are and whether you need to adjust your financial plans or take corrective actions to survive in the ever-changing volatile business environment. 

By the end of this blog, you will be able to understand variance analysis, its importance, and how to calculate it so you can leverage the cash properly and make strategic and informed business decisions.

What is Variance Analysis?

Variance analysis measures the difference between the forecasted cash position and the actual cash position. A positive variance occurs when actual cash flow surpasses the forecasted amount, while a negative variance indicates the opposite. Variance analysis helps you understand where you went over or under budget and why. 

This analysis provides insights into budget deviations and their underlying causes. It holds significance by enabling financial performance monitoring, trend identification, and informed decision-making for future planning. Through variance analysis, you can stay aligned with financial objectives and progressively enhance your profitability.

Types of Variance Analysis

Different types of variances can occur in the cash forecasting process due to reasons such as changes in market scenarios, customer behavior, and timing issues, among other factors. These variances can impact both sales revenue and expenses. By understanding the core impacts of these variances, companies can make necessary adjustments to their budgets, mitigate risks, and improve their overall financial performance.

Broadly, variances can be classified into two major categories:

  • Materials, Labor, and Variable Overhead Variances
  • Fixed Overhead Variances

 Types of Variance Analysis

Materials, labor, and variable overhead variances

These include price/rate variances and efficiency and quantity variances. Price/rate variances show the differences between industry-standard costs and actual pricing for materials, while efficiency variances and quantity variances refer to the differences between actual input values and the expected input values specified. This analysis plays a crucial role in managing procurement costs, making informed decisions, optimizing cost structures, and maintaining positive cash flow.

Fixed overhead variances 

Fixed overhead variances include volume variances and budget variances. Volume variances measure the difference between the actual revenue and budgeted revenue that is derived solely from changes in sales volume. Meanwhile, budget variances indicate the differences between actual and budgeted amounts. These variances help businesses understand the influence of sales volume fluctuations on financial performance, provide insights into the effectiveness of financial planning , and identify areas of overperformance or underperformance. 

Budget variances 

Budget variances can be divided into two subgroups: expense variances and revenue variances. Expense variance measures actual costs compared to the budgeted costs while revenue variances measure actual revenue with the budgeted revenue. Positive revenue variances represent revenue that exceeds the expected revenue, while negative revenue variances represent lower expected revenue.

Budget variance analysis are important to understand the reasons behind the deviations from the budgeted amounts. It enables the identification of avenues for enhancing business processes, boosting revenue, and cutting costs. By examining revenue variances, you can uncover possibilities for long-term efficiency improvements and increased business value.

Let’s take a look at an example of variance in budgeting 

Let’s say that your enterprise sells gadgets, and you’ve projected that you’ll sell $1 million worth of gadgets in the next quarter. However, at the end of the quarter, you find that you’ve only sold $800,000 worth of gadgets. That’s a variance of $200,000, or 20% of your original plan. By analyzing this variance, you can figure out what went wrong and take steps to improve your sales performance in the next quarter. Here, variance analysis becomes the vital tool that enables you to quickly identify such changes and adjust your strategies accordingly to manage your financial performance and optimize cash forecasting .

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Role of Variance Analysis 

In periods of market instability, your business could face unforeseen fluctuations in revenue, costs, or other financial indicators. In such cases, one of the most crucial tools in your financial management system is variance analysis.

Variance analysis allows you to track the financial performance of your organization and implement proactive measures to decrease risks and enhance financial health. It enables businesses to compare their expected cash flow with their actual cash flow and to identify the root reasons for any discrepancies. Businesses can acquire an important understanding of their cash flow performance and decide on appropriate actions in response to fluctuating market conditions.

For instance, If a company realizes its cash inflows are lower, it can cut costs or alter its pricing strategy to stay profitable. Likewise, if its real cash outflows exceed because of unforeseen costs, it can modify its financial plan or explore other funding choices.

Variance Analysis Formula 

The key components of variance are relatively straightforward; actuals vs. expected. Let’s look into the key variance analysis formula that focuses on specific financial metrics. These formulas unveil gaps between expected and actual results, providing insights into specific aspects of performance. 

Cost variance formula

Cost variance measures the difference between actual costs and budgeted costs. The cost variance formula is:

Cost Variance = Actual Costs – Budgeted Costs

This formula helps identify cost control issues, inefficiencies, and opportunities for improvement.

Efficiency variance formula

Efficiency variance measures the difference between actual input values (e.g., labor hours, machine hours) and budgeted or standard input values. The efficiency variance formula is:

Efficiency Variance = (Actual Input – Budgeted Input) × Standard Rate

This formula helps organizations identify variations in productivity and pinpoint areas for improvement.

Volume variance formula

Volume variance, also known as sales volume variance, measures the impact of changes in sales volume on revenue compared to the budgeted volume. The variance volume formula is: 

Volume Variance = (Actual Sales Volume – Budgeted Sales Volume) × Budgeted Selling Price

This formula helps organizations to understand the contribution of sales volume to revenue performance.

Budget variance formula

Budget variance measures the actual revenue with the budgeted revenue. The budget variance formula is:

Budget Variance = Actual Revenue – Budgeted Revenue

This formula aids in evaluating pricing strategies, market demand, and sales effectiveness.

Examples of Variance Analysis 

For instance, let’s consider, a company that plans to create a new mobile app with a projected cost of $50,000. The expected timeline for completion is 4 months, with a budgeted labor cost of $10,000 per month. The target is to release the application with 10 key features. Here are the examples that demonstrate different types of variances under this scenario:

Cost variance:

During the development process, the company implements cost-saving measures and efficient resource allocation, resulting in lower actual costs. The actual cost of the project at completion is $45,000. The cost variance can be calculated as follows:

Cost Variance = $45,000 – $50,000 = -$5,000

Here, the negative cost variance of -$5,000 indicates that the company has achieved cost savings of $5,000 compared to the budgeted cost for the project.

Efficiency variance:

The project is efficiently managed, and the team completes the development in 3.5 months instead of the budgeted 4 months. Assuming a budgeted labor cost of $10,000 per month, the efficiency variance can be calculated as follows:

Efficiency Variance = (3.5 months – 4 months) × $10,000 = -$5,000

The negative efficiency variance of -$5,000 indicates that the project was completed ahead of schedule, resulting in labor cost savings of $5,000.

Volume variance:

The final version of the mobile application is released with 12 key features instead of the budgeted 10 features. Assuming a budgeted revenue of $2,000 per feature, the volume variance can be calculated as follows:

Volume Variance = (12 features – 10 features) × $2,000 per feature = $4,000

The positive volume variance of $4,000 indicates that the company delivered additional features, resulting in increased revenue of $4,000 compared to the budgeted amount.

Budget variance:

The company spent $8,000 on marketing and promotional activities for the mobile application launch, while the budgeted amount was $10,000. The budget variance can be calculated as follows:

Budget Variance = $8,000 – $10,000 = -$2,000

The negative budget variance of -$2,000 indicates that the company spent $2,000 less than the budgeted amount for marketing and promotional activities.

In these scenarios, the company achieved cost savings, enhanced efficiency, delivered additional features, and spent less than the budgeted amount on marketing expenses. These variances provide insights into cost management, efficiency, revenue generation, and budget adherence within the given software development project scenario.

Benefits of Conducting Variance Analysis

Let’s take a look at the top 4 benefits enterprises can reap by conducting variance analysis for cash forecasting:

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Identify discrepancies

Variance analysis helps identify discrepancies between the actual cash inflows and outflows and the forecasted amounts. By comparing the forecasted cash flow with the actual cash flow, it is easier to identify any discrepancies, enabling the stakeholders to take corrective measures. 

Refine cash forecasting techniques

Conducting variance analysis allows for a review of past forecasts to identify any errors or biases that may have impacted accuracy. This information can be used to refine forecasting techniques, improve future forecasts make adjustments to existing forecast templates, or build new ones.

Improve financial decision-making

Understanding the reasons for variances can provide valuable insights that can help improve financial decision-making, which is critical in a volatile market. For example, if a variance is caused by unexpected expenses, management may decide to reduce expenses or explore cost-saving measures.

Better cash management

By analyzing variances, companies can identify areas where cash management can be improved. This can include better management of accounts receivable or accounts payable, more effective inventory management, or renegotiating payment terms with the suppliers.

Role of AI in Variance Analysis for Cash Forecasting

Amid turbulent market conditions, as companies prepare for 2024 and beyond, enterprises’ finance chiefs professionals are recommending various enhancements to improve decision-making. The most commonly mentioned improvements are the adoption of digital technologies, AI, and automation, and the enhancement of forecasting, scenario planning, and consistency in measuring key performance indicators, as per the Deloitte CFO Signals Survey .

This goes to show the significance of the adoption of advanced technologies, such as AI, for companies preparing for uncertain markets. The challenge with traditional variance analysis is that it is difficult for treasurers to create low-variance cash flow forecasts for enterprises as they utilize manual methods and spreadsheets while dealing with large volumes of data. Moreover, relying on manual variance reduction approaches leads to high variance and can be time-consuming, labor-intensive, and expensive, thus, delaying the decision-making process.

Here’s how AI addresses this challenge and enables it to take variance analysis to the next level: 

  • AI-based cash forecasting software helps in variance analysis by taking additional steps to improve the accuracy of the cash forecast by 90-95%. 
  • It enables organizations to continuously improve the forecast by understanding the key drivers of variance. 
  • It compares cash forecasts to actual results to check for variances, aligning the forecast with other aspects such as monthly, quarterly, and yearly forecasts, thus, ensuring that the forecast is accurate across various scenarios.
  • AI also analyzes the accuracy of cash forecasts through a line item analysis across multiple horizons and makes tweaks to the algorithm through an AI-assisted review process. 
  • Finally, AI fine-tunes the forecast model and enhances the data as needed to achieve the desired level of forecast accuracy. 

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Benefits of Leveraging AI in Variance Analysis

Here are some of the key benefits you can achieve by conducting variance analysis with AI in cash forecasting:

Benefits of Leveraging AI in Variance Analysis

Automated reporting

AI can streamline the process of reporting discrepancies in cash flow by delivering consistent reports that emphasize developments and regularities. Automating the process of reporting allows organizations to save time and resources that would otherwise have been spent on manual reporting. This also guarantees consistent and accurate reporting, removing the chance of human mistakes. By receiving frequent updates on discrepancies in cash flow as they occur, you can effectively monitor your business’s cash flow and pinpoint opportunities for enhancement to optimize your financial results.

Faster, data-driven decision-making

AI can assist in making quicker, better-informed decisions about managing cash flow by providing in-depth insights on cash forecasts in real time. This can assist companies in promptly addressing fluctuations in cash flow and implementing necessary measures. This is especially crucial in periods of market volatility when cash flow trends can quickly fluctuate and unforeseen circumstances may arise.

Real-time cash analysis & better liquidity management 

With AI at its core, cash flow forecasting software can learn from industry-wide seasonal fluctuations to improve forecasting accuracy. AI-powered cash forecasting software that enables variance analysis can also create snapshots of different forecasts and variances to compare them for detailed, category-level analysis. Offering such comprehensive visibility, helps you respond quickly to changes in cash flow, take corrective action as needed, and manage your enterprise’s liquidity better. 

Improved cash forecasting accuracy with real-time cash analysis

AI streamlines your examination of cash flow by delving deeply into and analyzing a large volume of data from various sources, such as past cash flow information, market trends, and economic indicators, in real time. Therefore, it allows for an immediate understanding of discrepancies in cash flow. This can offer a more in-depth assessment of cash flow discrepancies, enabling the recognition of trends and patterns that may not be visible through manual review.

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How HighRadius Can Help Automate Variance Analysis in Cash Forecasting? 

In a rapidly evolving business landscape, market uncertainties and disruptions can have a significant impact on an enterprise’s financial stability. That’s why having a robust cash forecasting system with AI at its core is essential for businesses to conduct automated variance analysis. HighRadius’ cash forecasting software enables more advanced and sophisticated variance analysis that helps you achieve up to 95% global cash flow forecast accuracy. 

By leveraging its AI capabilities in data analysis, pattern recognition, real-time integration, and predictive modeling, it empowers finance teams to gain deeper insights, improve accuracy, and make more informed decisions to manage cash flow effectively. Furthermore, our solution helps continuously improve the forecast by understanding the key drivers of variance. The AI algorithm learns from historical data and feedback, continuously improving their accuracy and effectiveness over time. This iterative learning process enhances the quality of variance analysis results. 

Our AI-based cash forecasting solution supports drilling down into variances across various cash flow categories, geographies, and entity-level variances performing a root cause analysis, and helps achieve up to 98% automated cash flow category tagging. 

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1) What is the difference between standard costing and variance analysis?

Standard costing is setting an estimated (standard) cost on metrics such as input values, materials, cost of labor, and overhead based on industrial trends and historical data. Variance analysis focuses on analyzing and interpreting differences (variances) between actual costs and standard costs.

2) What are the three main sources of variance in an analysis?

In variance analysis, the three main sources of variance are material variances (differences in material usage or cost), labor variances (variations in labor productivity or wage rates), and overhead variances (deviations in overhead costs).

3) What is P&L variance analysis?

P&L (profit & loss) variance analysis is the process of comparing actual financial results to expected results in order to identify differences or variances. This type of variance analysis is typically performed on a company’s income statement, which shows its revenues, expenses, and net profit or loss over a specific period of time. 

4) Why is the analysis of variance important?

The analysis of variance is important to keep track of as it tells about the financial health of your business. With proper variance analysis, you can measure the financial performance of your business, keep track of over and under-performing financial metrics, and identify areas for improvement.

Related Resources

Why Cash Flow Is King: Importance & How to Improve It

Financial Forecasting Models: Pros, Cons & Tips from Experts [Free Templates]

Financial Forecasting Models: Pros, Cons & Tips from Experts [Free Templates]

The Business Case for Automating Cash Forecasting

The Business Case for Automating Cash Forecasting

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How To Perform Variance Analysis

Variance analysis is a technique used for evaluating the difference between planned and actual figures . This can be applied to time, resources and any other factor that has a major impact on your project. The total time spent on your project can be analysed by evaluating the difference between the planned time and the actual time.

Variance analysis allows the business analyst to understand the reason for the difference by revealing answers to critical questions such as: What happened? Why did we exceed the budget? Why didn't we meet the deadline? Why did we require more business analyst effort than we planned?

Variance analysis would typically take place at the end of the project.

So, what are the steps you need to take to conduct variance analysis?

PRACTICAL APPLICATION

  • Plan Variance Analysis  - Determine which metrics you'd like to collect/compare and create an appropriate model in Excel. Are you comparing the number of business analyst resources required for one project phase to another? Or are you comparing the total number of business analyst resources required from one phase to another across multiple projects?
  • Set the Materiality Threshold  - This is the point at which variance starts to matter. For example, if you set a 4% threshold on time, a 2% time overage may not mean much and may not require any cause analysis. A 10% time overage may however, be worrisome and you would want to investigate further.
  • Cause Analysis -  This is where you determine the cause of the variance. The insight you gain here is certainly critical to making business decisions and future adjustments. 
In order to produce useful reports on how variances have affected your project , you must always consider the context in which the variance occurred.

CASE 1: Business Analysis Project A

Let X = No. of Business Analysts (Planned) = 5

Let Y = Number of Business Analysts Assigned (Actual) = 3

%age Variance = ((X - Y)/X) * 100 = (2/5) * 100 = 40%

CASE 2: Business Analysis Project B

Let X = No. of Business Analysts (Planned) = 5

Let Y = Number of Business Analysts Assigned (Actual) = 8

%age Variance = ((X - Y)/X)* 100 = (-3/5) * 100 = -60%

While a positive variance is not necessarily a bad thing (As seen in this case where less resources were used than planned), a negative variance is almost always a source of worry. Both cases need to be analysed to understand why and to ensure you keep doing more of the positive things and less of the negative.

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The variance analysis cycle: steps, formulas & tips

Sabrinthia Donnelly

Sabrinthia Donnelly

What is the variance analysis cycle.

The variance analysis cycle is a systematic process of comparing actual financial performance against planned or standard performance. It helps us understand the "why" behind the "what" when it comes to deviations between our financial plans and actual results.

Think of it like this: you've carefully crafted a budget for your project, estimating costs for materials, labor, and overhead. But, midway through the project, your expenses are exceeding projections. 🚀

The variance analysis cycle is like figuring out why these costs are off (maybe material prices rose unexpectedly, productivity levels were lower than anticipated, or there were unforeseen changes).

This cycle helps us unravel the reasons behind the differences between what we expected to happen financially (budgeted or planned figures) and what actually happened (our real-world results).

By understanding these variances, we can: 

  • Identify areas for improvement: Is there a cost overrun because of inefficiencies, or did unforeseen circumstances impact sales?
  • Make smarter decisions: Knowing the "why" behind variances helps us make informed choices about resource and budget allocation and future plans.
  • Boost overall performance: By analyzing variances, we can continuously refine our forecasting and planning processes , leading to better financial health.

What are the steps in the variance analysis cycle?

The variance analysis cycle is a framework for understanding why your financial results might differ from what you originally planned. 

Here are the key steps to follow: 

The Variance Analysis Cycle

1. Prepare performance report  

Document everything in a clear performance report . This includes:

  • Any variances you found
  • Why you think they happened
  • What steps you took to address them
  • The results of those actions

By doing this, you'll create a baseline for identifying and quantifying any variances. Your performance report serves as valuable documentation and helps guide future decision-making.

2. Analyze variances

Once the performance report is prepared, the differences between the actual results and budgeted values are calculated. This analysis helps identify potential areas of concern and efficiency.

3. Raise important questions

Next, compare your budget or forecasts to your actual results. Where do you see differences?

Don't just note the numbers, start asking questions:

  • Why are our expenses higher than we thought?
  • Did something cause our sales to fall short?
  • Are there unexpected factors dragging down our profits?

4. Identify the causes

Once you have a list of questions, it's time to dig deeper and identify the root causes of the variances. This involves gathering data, analyzing trends , and conducting various 'investigations'.🕵🏼‍♂️

You might need to:

  • Review historical data to identify patterns and trends.
  • Consult with operational teams to understand specific challenges and inefficiencies.
  • Analyze market data to identify external factors influencing performance.

5. Take corrective actions

Based on your findings, it's crucial to take action to address the identified variances. Possible actions resulting from the variance analysis cycle may involve:

  • Implementing corrective measures to improve efficiency, reduce costs , or boost sales.
  • Reallocating resources to capitalize on opportunities or mitigate risks .
  • Revising budgets and forecasts to reflect new realities and insights.

6. Conduct operations for the next period

By the time you’ve reached this step, you’ve got enough knowledge to tackle the next period’s operations with a more informed approach.

Think about applying what you learned to help set more achievable targets, allocate resources better, and implement proactive measures to prevent future variances. 

business case study variance analysis

Why do variances occur?

Variances occur because reality doesn't always perfectly match our plans. These discrepancies can arise from various factors, both internal and external to the company.

Here are some of the most common reasons for variances:

  • Market fluctuations:  Unexpected changes in the market, like sudden increases in raw material prices or dips in consumer demand, can throw your budget off track.
  • Operational inefficiencies:  Internal factors like production delays, excessive scrap, or inefficiencies in resource allocation can lead to higher costs or lower output than anticipated.
  • Pricing issues:  Unforeseen changes in competitor pricing strategies or an inability to raise your prices as planned can impact your revenue stream negatively.
  • External factors:  Unexpected events like natural disasters, political instability, or changes in regulations can disrupt your operations and financial performance.
  • Human error:  Mistakes in planning, budgeting , or execution can also lead to variances.

The formula behind the analysis

The variance analysis cycle relies on a specific formula to quantify the difference between budgeted and actual results.

Let's break down the formula itself, how to use it in Excel , and explore specific variations…

What is the formula for variance analysis?

The core formula for variance analysis calculates the difference between the budgeted (or planned ) value (B) and the actual value (A):

Variance = Actual (A) - Budgeted (B)

This straightforward formula provides a basic understanding of how much your results deviated from your expectations. 

However, for a deeper analysis, we need to consider different types of variances, leading to more specific formulas.

What is the formula for variance analysis in Excel?

Excel offers various built-in functions to calculate variances depending on what you're analyzing and whether you're dealing with the entire population or a sample:

Population variance: Use the VAR.P(range) function, where "range" refers to the cells containing your data.

Sample variance: Use the VAR.S(range) function.

Price variance: This calculates the difference between the actual price paid (AP) and the budgeted price (BP) multiplied by the actual quantity (Q):

Price Variance = (AP - BP) * Q

Quantity variance: This calculates the difference between the actual quantity (Q) and the budgeted quantity (BQ) multiplied by the budgeted price (BP):  

Quantity Variance = (Q - BQ) * BP  

business case study variance analysis

How do you use the variance formula?  

Here's a general step-by-step approach to using the variance analysis cycle formula in Excel : 

1. Input your data: Enter your budgeted and actual values in separate columns.

2. Choose the appropriate formula: Depending on the type of variance you're analyzing (population, sample, price, or quantity), select the appropriate formula from the above options.

3. Reference your data: Enter the cell range containing your budgeted and actual values into the formula function. 

4. Calculate the variance: Press Enter to calculate the variance for each data point. 

5. Analyze the results: Look for significant variances and use them as a starting point for further investigation into the root causes.

By understanding the basic formula and its variations in Excel, you can unlock valuable insights from your financial data and utilize the variance analysis cycle effectively to enhance your financial planning and decision-making.

Types of variance analysis

The variance analysis cycle dives deeper by focusing on specific areas within your budget. This lets you pinpoint the root causes of variances much better.

Below, we'll explore three common types of variance analysis: material, labor, and overhead variances.

1. Material variance analysis

This focuses on understanding the difference between the actual cost of materials used (ACM) and the budgeted cost of materials (BCM) for the actual quantity (Q) used:

Material Variance = (ACM - BCM) * Q

This variance can be further broken down into price variance (difference between actual and budgeted price per unit) and quantity variance (difference between actual and budgeted quantity used).

2. Labor variance analysis

This examines the difference between the actual cost of labor (ACL) and the budgeted cost of labor (BCL) for the actual hours worked (AH):

Labor Variance = (ACL - BCL) * AH

Like material variance, this can be further analyzed as labor rate variance ( difference between actual and budgeted hourly wage ) and labor efficiency variance ( difference between actual and budgeted hours worked for a given output ).

3. Overhead variance analysis

This analyzes the difference between the actual overhead cost (AOC) and the budgeted overhead cost (BOC):

Overhead Variance = (AOC - BOC)

Overhead costs are indirect and often fixed within a specific time period. Therefore, this variance can be further categorized as fixed overhead spending variance (difference between actual and budgeted fixed overhead cost) and variable overhead spending variance (difference between actual and budgeted variable overhead cost per unit of activity).

business case study variance analysis

How to calculate spending variance

Spending variance refers to the difference between the actual amount you spent and the amount you budgeted to spend.

To calculate spending variance, you can use this formula:

Spending Variance = Actual Spending - Budgeted Spending

Let's say you planned to spend $500 on marketing for the month. However, due to unforeseen circumstances, your actual spending reached $620. Plugging these values into the formula, we get:

Spending Variance = $620 (Actual) - $500 (Budgeted) = $120

In this case, the positive variance of $120 indicates that you overshot your budget by $120. This could be a cause for concern, prompting you to investigate further and take corrective actions.

Remember, variances can be favorable or unfavorable depending on the situation and your goals. By calculating and understanding spending variances, you gain valuable insights into your spending patterns and can make informed decisions to optimize your financial health.

What is budget variance analysis?

Budget variance analysis compares actual results to the original budget . It's a broader approach that doesn't necessarily consider standard costs and can be used for various expense categories, including materials, labor, and overheads.

What is the standard cost variance analysis?

Standard cost variance analysis compares actual results to predefined standard costs . Standard costs are predetermined estimates of what a cost should be under normal operating conditions.

This approach allows for a more detailed understanding of cost variances beyond simply comparing actuals to the budget.

business case study variance analysis

Is variance positive or negative?

Variance itself isn't inherently positive or negative. It's simply the difference between what you expected (budgeted) and what actually happened. It's like the gap between your planned destination and the actual road you end up taking.

However, the context of the variance matters more:

If the  actual cost  comes in  under budget  (positive variance), that's a good thing.

But, if the  actual cost  is  higher than expected  (negative variance), that means you went over budget. This might not be ideal, but it helps you understand where you might need to adjust your spending in the future.

So, while the variance itself doesn't have a positive or negative sign, understanding the "why" behind the variance helps you determine if it's an opportunity to celebrate or a cause for further analysis and potential adjustments.

Can variance be zero?

Yes, a variance can be zero! This occurs when the actual results perfectly match the budgeted or planned figures.

In simpler terms, it means everything went exactly according to plan, with no surprises (either positive or negative) in terms of costs, revenues, or other financial metrics .

What causes an unfavorable variance?

Not all variances are created equal. While some might be cause for celebration (think coming in under budget), others can raise an eyebrow or two.

Unfavorable variances occur when the actual results fall short of expectations , meaning your expenses are higher or your revenues are lower than what you budgeted for.

So, what leads to unfavorable variances?

Some common culprits include:

  • Market fluctuations:  Unexpected changes in the market, like a sudden rise in raw material prices or a dip in consumer demand, can throw your budget off track.
  • Pricing issues:  Unforeseen changes in competitor pricing strategies or an inability to raise your own prices as planned can impact your revenue stream negatively.

These are just a few examples, and the specific causes of unfavorable variances will vary depending on your industry and unique circumstances.

Are unfavorable variances always bad?

While unfavorable variances, meaning actual results falling short of expectations, are generally unwelcome surprises, they're not always a bad thing.

If you want to have a more positive outlook on things, you can look at them as valuable wake-up calls, prompting deeper analysis of inefficiencies and corrective actions that ultimately lead to improved performance and future cost-saving opportunities .

The key is to view them not as failures, but as stepping stones toward ongoing financial optimization .

How to tell if variance is favorable or unfavorable

Imagine you budgeted to spend $100 on office supplies for the month, but only ended up spending $83. Great news, right? This favorable variance means you spent $17 less than expected, saving some precious cash.

However, the opposite scenario can also occur. If you budgeted $100 but ended up spending $123, you have an unfavorable variance . This means you overshot your budget by $23, a potential cause for concern.

Here's how you can tell if the variance is favorable or unfavorable:

  • Favorable variance:  Actual results are  better  than the budget (e.g., spending less than expected).
  • Unfavorable variance:  Actual results are  worse  than the budget (e.g., spending more than expected).

business case study variance analysis

How often is variance analysis performed?

The frequency of variance analysis can vary depending on several factors, but some typical timeframes and influencing elements are worth exploring.

Some common frequencies include monthly, quarterly, or biannually (twice a year).

Let’s take a closer look at why some finance and FP&A teams choose these timeframes:

This is a popular choice for many companies because it enables timely identification and response to variances before they snowball into bigger issues. It provides a good balance between capturing recent trends and maintaining a manageable workload for FP&A teams.

This approach offers a broader perspective, enabling analysis of longer-term trends and potential seasonal fluctuations. It might be suitable for companies with more stable operations or less volatile industries.

This is less frequent but can be appropriate for businesses with highly predictable and stable financial performance or those with limited resources for frequent analysis.

There's no one-size-fits-all answer to how often variance analysis should be performed. And it’s important to keep in mind that frequency can vary based on:

  • Industry volatility (e.g., tech vs. utilities)
  • Company size and complexity (larger = more frequent)
  • Risk tolerance and management style (conservative = more frequent)
  • Significance of variances (major variances = more frequent)
  • Available FP&A resources (limited resources = less frequent)

How to write a variance analysis report

Variance analysis reports are important for understanding why your financial results might differ from your plans. But how do you write a report that's clear, informative, and engaging?

Here are some tips to help you write a variance analysis report:

1. Start with a strong introduction: Briefly introduce the report, stating the period analyzed and the key variances investigated.

2. Findings (show, don’t just tell): Present the identified variances in a clear and concise format, like tables or charts . Include explanations for each significant variance, using clear and non-technical language.

3. Analysis: Dig deeper into the "why" behind the variances. Explain the root causes, using data, examples, or insights from discussions with relevant teams.

4. Action plan: Based on your analysis, propose specific actions to address the variances. This might involve cost-saving measures, pricing adjustments, or process improvements. Be clear about who is responsible for implementing each action item.

5. Wrap it up: Summarize your key findings and reiterate the impact of the variances on the organization's financial performance. Briefly mention any recommendations for future planning or process improvement.

Key components:

  • Clarity is king:  Use simple language, avoid technical terms, and explain any necessary jargon.
  • Visual appeal:  Use charts, graphs, or tables to present complex data efficiently and visually.
  • Actionable insights:  Don't just present the problems; provide concrete solutions and recommendations.
  • Keep it concise:  Aim for a focused report, avoiding unnecessary details or fluff.

By following these tips, you can create a powerful variance analysis report that informs and empowers your colleagues to make data-driven decisions.

business case study variance analysis

FAQs: The variance analysis cycle

The variance analysis cycle is a continuous process of comparing actual results to planned figures, analyzing the differences (variances), identifying root causes, and taking corrective actions to improve future performance.

To investigate and resolve variances, you'd gather relevant data, analyze trends, consult with stakeholders from different departments to gain insights, identify the underlying reasons behind the variances, and develop and implement corrective actions like cost-saving measures, pricing adjustments, or process improvements.

The root cause of variance analysis isn't about finding blame, but rather about understanding why actual results differ from planned figures. This knowledge helps prevent similar issues and improve financial planning and decision-making.

Unfavorable variance occurs when the actual results fall short of expectations compared to the planned figures, such as experiencing higher costs, lower sales, or lower efficiency levels.

Variance analysis helps us understand why financial results differ from plans, identify areas for improvement within the organization, and make informed decisions about future plans, resource allocation, and adjustments to strategies.

While time-consuming and requiring skilled personnel to interpret data and take effective actions, variance analysis is crucial because it helps us understand and address the root causes of discrepancies, ultimately leading to better financial performance.

Variances can stem from various factors, both internal (operational inefficiencies) and external (market fluctuations), and even human error.

Correcting variances depends on the identified root cause, but might involve implementing cost-cutting measures, adjusting pricing strategies, improving internal processes, or revising future plans and budgets.

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Variance Analysis

Last updated 22 Mar 2021

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In this short revision video I explain the basics of variance analysis.

  • Variance analysis
  • Favourable variance
  • Adverse variance

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Variance Analysis in Budgeting & Accounting

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What is Variance Analysis?

Variance analysis is a technique used in accounting and financial management to compare actual results with predicted or budgeted results. It involves analyzing the differences between the actual results and the planned or expected results to identify the reasons for the variances and take corrective action if necessary.

By conducting variance analysis, businesses can identify areas of improvement, determine the causes of any deviations from the plan, and take corrective actions to get back on track. It helps in identifying areas where the business is doing well and where it needs improvement to achieve its objectives.

What is Variance Analysis

Variance Analysis Formula

The formula for variance analysis can vary depending on the specific application, but a general formula for calculating variance is:

Variance = Actual Amount – Budgeted Amount

  • Actual Amount: the actual amount of a particular item, such as revenue or expenses, for a given period of time.
  • Budgeted Amount: the amount that was expected or planned for that same item for the same period of time.

The variance can be positive, indicating that the actual amount exceeded the budgeted amount, or negative, indicating that the actual amount fell short of the budgeted amount. A large positive or negative variance can be a sign that there may be issues that need to be addressed in order to improve financial performance.

In addition to this basic formula, there are many variations and specific formulas used for variance analysis in different fields and industries, such as manufacturing , healthcare, and project management.

The Role of Variance Analysis in Budgeting

Variance analysis helps businesses to monitor their financial performance and identify areas where they are underperforming or overperforming.

As discussed, it involves comparing actuals against expected results and analyzing the differences. The differences can be positive or negative, and they can be expressed as either favorable or unfavorable variances.

Favorable variances are those that result in better-than-expected financial performance, while unfavorable variances result in worse-than-expected performance. By comparing the variances, businesses can see the causes of the differences and take corrective actions to address any problems or capitalize on any opportunities.

Variance analysis is particularly useful in budgeting because it helps businesses to:

Monitor and evaluate financial performance

By comparing actual results to budgeted results, businesses can quickly identify areas where they are over or underperforming.

Identify the causes of variances

Variance analysis enables businesses to identify the reasons for the differences between actual and budgeted results. This information is essential for developing corrective actions that can improve financial performance.

Evaluate the effectiveness of budgeting

By analyzing variances, businesses can evaluate how accurate their budgeting process is and make improvements if necessary.

Make informed decisions

By understanding the causes of variances, businesses can make informed decisions about resource allocation and prioritize areas where corrective actions are needed.

Plan Your Cash Flow

Types of Variances

There are several types of variance analysis.

Cost Variance Analysis

This type of variance analysis is used to identify the difference between the actual cost in producing a product or delivering a service and the expected cost. It is useful for identifying areas of inefficiency or cost overruns.

Cost Variance Analysis Formula

CV = Earned Value (EV) – Actual Cost (AC)

  • Earned Value (EV) represents the budgeted cost of the work that has been completed up to the point of analysis, as determined by the project’s performance measurement baseline (PMB).
  • Actual Cost (AC) represents the actual cost incurred by the project up to the point of analysis.

If the resulting CV is a positive number, it means that the project is under budget. Conversely, if the CV is negative, it means that the project is over budget. A CV of zero means that the project is exactly on budget.

Revenue Variance Analysis

This type of variance analysis is used to identify the difference between actual revenue and expected revenue. It is useful for identifying areas where sales are falling short of expectations or where pricing strategies may need to be adjusted.

Revenue Variance Analysis Formula

Revenue Variance = Actual Revenue – Expected Revenue

  • Actual Revenue: The revenue that a company has actually earned during a particular period.
  • Expected Revenue: The revenue that a company was forecasted or budgeted to earn during the same period.

If the revenue variance is positive, it means that the company has earned more revenue than expected. If the variance is negative, it means that the company has earned less revenue than expected.

Volume Variance Analysis

This type of variance analysis is used to identify the difference between actual sales volume and expected sales volume. It is useful for identifying areas where sales are falling short of expectations or where capacity utilization is not optimal.

Volume Variance Analysis Formula

Volume Variance = (Actual Quantity – Budgeted Quantity) x Budgeted Price

  • Actual Quantity: The actual number of units sold or produced during a period.
  • Budgeted Quantity: The number of units that were planned to be sold or produced during a period.
  • Budgeted Price: The expected price per unit for the budgeted quantity.

The volume variance can be calculated for different elements of the business, such as sales or production, and can be used to determine the factors that caused the variance. If the volume variance is positive, it means that the actual quantity sold or produced exceeded the budgeted quantity, and if it is negative, it means that the actual quantity was lower than the budgeted quantity.

Material Variance Analysis

This type of variance analysis is used to identify the difference between the actual cost of materials used in production and the expected cost. It is useful for identifying areas where waste or inefficiency is occurring in the use of materials.

Material Variance Analysis Formula

Material Cost Variance = (Actual Quantity of Material Used x Actual Cost of Material) – (Standard Quantity of Material Allowed x Standard Cost of Material)

  • Actual Quantity of Material Used: the total amount of materials actually used in production.
  • Actual Cost of Material: the actual cost incurred to purchase the materials used in production.
  • Standard Quantity of Material Allowed: the amount of material that should have been used based on the standard set by the company.
  • Standard Cost of Material: the standard cost of materials established by the company.

The Material Cost Variance can be further broken down into two components:

Material Price Variance

The difference between the actual cost of materials purchased and the standard cost of materials that should have been paid.

Material Price Variance = (Actual Quantity of Material Used x (Actual Price – Standard Price))

  • Actual Price: the actual price paid for the materials purchased.
  • Standard Price: the standard price set by the company for the materials.

Material Usage Variance

The difference between the actual amount of materials used and the standard amount of materials that should have been used.

Material Usage Variance = (Standard Price x (Actual Quantity of Material Used – Standard Quantity of Material Allowed))

  • Standard Quantity of Material Allowed: the amount of material that should have been used based on the standard set by the company. Standard Price: the standard price set by the company for the materials.

Labor Variance Analysis

This type of variance analysis is used to identify the difference between the actual labor cost incurred and the expected cost. It is useful for identifying areas where labor inefficiencies or productivity issues may be occurring.

Labor Variance Analysis Formula

Labor Variance = (Actual Hours Worked x Actual Rate) – (Standard Hours Allowed x Standard Rate)

  • Actual Hours Worked: The total number of hours worked by employees during a specific period.
  • Actual Rate: The actual rate per hour paid to employees during the same period.
  • Standard Hours Allowed: The standard number of hours allowed for completing a specific job or task.
  • Standard Rate: The standard rate per hour paid to employees for completing the same job or task.

By comparing the actual labor cost with the standard labor cost, managers can identify whether labor costs are higher or lower than expected. If the actual labor cost is higher than the standard labor cost, it indicates that the labor cost was not efficiently managed, and corrective actions need to be taken to reduce the cost. On the other hand, if the actual labor cost is lower than the standard labor cost, it indicates that the labor was managed efficiently, and the company can take steps to maintain or improve the current performance.

Overhead Variance Analysis

This type of variance analysis is used to identify the difference between the actual overhead cost incurred and the expected cost. It is useful for identifying areas where overhead costs are higher than expected, such as in utilities or rent.

Overhead Variance Analysis Formula

Overhead Variance = Actual Overhead Costs – Budgeted/Standard Overhead Costs

  • Actual overhead costs: The actual expenses incurred by a business during a particular period. These costs include all the indirect expenses associated with the production process, such as rent, utilities, depreciation, and indirect labor costs.
  • Budgeted/standard overhead costs: The estimated or predetermined costs that a business expects to incur during a particular period. These costs are calculated based on various factors such as historical data, industry benchmarks, and production levels.

By comparing the actual overhead costs with the budgeted or standard overhead costs, businesses can identify the reasons for the variance and take corrective actions to control their overhead expenses.

types of variance analysis

Problems with Variance Analysis

There are some potential problems that can arise when using variance analysis, including:

Incomplete or inaccurate data

Variance analysis requires accurate and complete data in order to be effective. If the data used in the analysis is incomplete or inaccurate, the results will not be reliable or meaningful.

Overreliance on averages

Averages can be useful for summarizing large amounts of data, but they can also be misleading if there is a lot of variation within the data. In some cases, it may be more useful to look at the distribution of the data or to use other statistical measures to gain a better understanding of the variability.

Failure to consider all factors

Variance analysis typically focuses on financial data, but there may be nonfinancial factors that are also contributing to the variance. For example, changes in market conditions, customer preferences, or production processes may all have an impact on the results, but may not be reflected in the financial data.

Inappropriate benchmarking

Variance analysis often involves comparing actual results to some kind of industry benchmark or standard. However, if the benchmark is inappropriate or unrealistic, the results may be misleading. It is important to carefully select the appropriate industry benchmarks and to adjust them as needed based on changes in the business environment.

Failure to consider causality

Variance analysis can identify differences between actual and expected results, but it does not necessarily explain why those differences exist. It is important to dig deeper and identify the underlying causes in order to develop effective strategies for improvement.

Example of Variance Analysis

Imagine a company that budgeted $100,000 for sales revenue in a particular quarter but only achieved $90,000 in actual sales revenue. The variance is -$10,000, which indicates that the actual performance is worse than the planned performance.

The company can perform a variance analysis to identify the reasons for the variance. Possible reasons may include lower than expected sales volume, lower selling prices, or higher costs of goods sold. By identifying the cause of the variance, the company can take corrective action, such as adjusting sales strategies or reducing costs, to improve future performance.

Using financial forecasting tools for financial analysis

Variance analysis is just one aspect of tracking and assessing your business’ financial performance and objectives. A financial forecasting tool can be an excellent companion for financial analysis as they help businesses make informed decisions based on accurate predictions of future financial performance.

The Brixx financial forecasting tool can ensure that variance analysis, alongside other financial components, are tracked and reported on with ease – simply needing a few data entries to be entered throughout the software. Enjoy a free demo of Brixx, or sign up today for a trial.

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What is Variance Analysis: A Frontier for Analysis

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There are a variety of ways by which you can assess your business’ overall financial health and success. By utilising  data analytics  and performing variance analysis, you may become aware of business practices or decisions that need to be amended. But, many times, most businesses have a hard time conducting variance analysis because data is in many places, running analytics hasn’t yet been optimised to glean useful insights, and manipulating the data takes too much time. 

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We’ll outline what variance analysis means, the ways in which you can carry it out smarter so it is more useful and how automation tools can help perform the work for you so that you can use variance analysis to a greater advantage.

Table of Contents

1. What is the Variance Analysis?

2. Importance of Variance Analysis

3. The Role of Variance Analysis

4. Example of Variance Analysis

5. What are the Key Terms of Variance Analysis?

6. What are the Most Common Types of Variance Analysis?

7. Challenges of Variance Analysis

8. How Automation Tools Can Help

What is the Variance Analysis?

Variance analysis is a method of assessing the difference between estimated budgets and actual numbers. It’s a quantitative method that helps to maintain better control over a business. When using variance analysis, one best practice is to review variances on a trend line so that you can readily pinpoint any dramatic shifts. Once you find anything that is suspect, variance analysis can help you to investigate the reason behind the big difference in what’s planned and what happened financially. 

During a reporting period, you can sum all variances to see if your business is over or under-performing. When you notice a significant shift in the variance trend line, then you can become aware of dysfunction and work to resolve it. But, where do you begin and how can you pinpoint what’s causing the variance? This is where automation can help to assess the data points and highlight the issues. 

The variance analysis that you choose to focus on will depend on the type of business you operate. The reason for variances also are dependent on certain factors, like:

  • Market conditions 
  • Budgeting standards 
  • Difficulty benchmarking 
  • Material variances
  • Overhead variances 
  • Labour variances 

Importance of Variance Analysis

Variance analysis provides organisations with a lot of benefits, including:

  • Planning:  Helps managers to budget smarter and more accurately
  • Control:  Assists in more significant control management of departments and budgeting 
  • Responsibility:  Helps with the assignment of trust within an organisation 
  • Monitoring:  Helps to monitor success and failure 
  • Sets Expectations : Encourages forward-thinking and helps to set benchmarks 

Variance analysis becomes an integral part of an organisation’s information system. Not only does it help to regulate control across departments, but it also provides a running tab of what can be realistically expected versus what occurs. 

business case study variance analysis

The Role of Variance Analysis

Variance analysis is used to assess the price and quantity of materials, labour and overhead costs. These numbers are reported to management. While it’s not necessary to focus on every variance, it becomes a signalling mechanism when a variance is salient. In this way, management can rely on variance analysis to help to improve the company’s overall performance or  process improvement  protocol. 

More importantly, variance analysis plays a significant role in decision-making and how managers approach tasks and projects. When performed correctly and consistently, it can help to keep teams on the right path to achieve long-term business goals. However, many businesses fail to reap the benefits of variance analysis because it has to be performed consistently and promptly to work. 

To accurately forecast future revenue or costs, it is necessary to have organised data from history.  This calls for automation solutions such as  SolveXia  that can store all data in a centralised location and can automatically be pulled, manipulated and transformed into insights for decision-making. When your financial team is being pulled in so many directions and spends time on low-value time-consuming data entry and repetitive tasks, then variance analysis can easily fall by the wayside. A  data automation tool  can maximise your team’s productivity by pulling data from various sources, providing real-time analytics and reports to key stakeholders. 

DOWNLOAD NOW DATA AUTOMATION DATA SHEET Automate your data preparation and reporting. Ensure accuracy and scalability.  

Example of Variance Analysis

Let’s take a look at how this works in a real-world scenario with a sample of variance analysis. 

A business uses variance analysis to find there is a $50,000 variance in one of its cost centres. 

To determine how and why this happened, it requires further variance analysis to understand if the difference came from price changes or a difference in the quantity of materials being used. Maybe it is a growing trend or a one-off event. It could also be erroneous data entry. Either way, if the company aims to keep costs low and operate at its maximum efficiency, then it’s necessary to have these results immediately to help manage future operations. 

For accurate variance analysis, data must be correct to reflect what happened. With automation, you will be able to quickly link up all your data systems and compare historical data with current data without human interference and the system will highlight what has since changed allowing the business to find the source of the issue fast and understand quickly if it is a cause for concern, or if there is a risk or opportunity in the business.

What are the Key Terms of Variance Analysis?

With these variance analysis examples in mind, there are some key terms to remember when performing your own analysis and to better understand its purpose. Take a look:

  • Overhead costs: Overhead costs are a business; operating expenses, such as office rent costs, insurance costs, and the like. In order to minimise expenses, companies audit their own operating expenses to see where overhead costs may be cut.
  • Variable price and rate variance: These refer to the changes in the cost of products or services. They may change because of unforeseen reasons or be adjusted to better reflect consumer demands and supply rates.
  • Budgets: Budgets are financial plans used to allocate spending and mitigate against overspending. Budgets can be revised in real-time to meet goals.
  • Fixed budget variance: Fixed budget variance refers to the difference between overhead costs in a budget and the actual amount of overhead costs in a variance period.

What are the Most Common Types of Variance Analysis?

Here’s a look at the most common types of variance that occur within organisations: 

1. Material yield variance:

This is the difference between what you expected to use and what you used, multiplied by the cost of the materials. You can calculate this with this formula: (the actual unit used - standard unit usage) x standard cost per unit.

This helps companies determine if they are using more materials than they actually need to be. With this variance known, companies can adjust their purchase orders from suppliers and reduce waste.

2. Labour efficiency variance:

This is a measure of how well you utilise labour relative to what you expect to need. The variance is calculated by (actual hours - standard hours) x standard rate.

With this number in mind, companies can assess how efficiently their labour is being used and if the pricing is a good fit for the business’ needs.

3. Fixed overhead spending variance:

The difference between the actual fixed overhead expense and the budgeted overhead expense. Since this is supposed to be a fixed amount, it shouldn’t vary so much from the budget.

If the variance is high between the budget and the actuals, it signals room for improvement in which the company can revisit its budget plans. It’s useful to more accurate budget allocation to see if more money can go to different places for the business to function more effectively.

4. Purchase price variance: 

‍ Take the actual price paid for raw materials and subtract the standard cost times the number of units used. 

5. Labour rate variance: 

‍ Same as above, but with labour instead of products. Take the actual price paid for a direct job, subtract the standard cost and multiply by the number of units used (wages). 

6. Variable overhead spending variance: 

‍ Subtract the standard variable overhead cost per unit from the actual cost incurred. Then, multiply the remainder by the total unit quantity of output.   ‍

7. Variable overhead efficiency variance: 

‍ This is the difference between how many hours were worked versus what was budgeted for the work. It is calculated by standard overhead rate x (actual hours - standard hours). 

Not every organisation will focus on the same variance calculations. Depending on your service line and business goals, you will choose what variance analysis makes the most sense to track to ensure you are maximising efficiency and minimising costs. 

business case study variance analysis

Challenges of Variance Analysis 

From all we know, there is a lot in favour of using variance analysis to help control business and manage finances well. However, there are challenges to variance analysis. 

  • Time delay:  Variances are calculated at each month’s end by the accounting team. Then, the information is shared with management teams. But, organisations don’t pause their inputs and outputs while waiting for variance analysis to happen so that this time delay could result in delayed red flags. 
  • Source information:  Some of the information needed to calculate variances don’t always appear in regular accounting reports. Therefore, it may take extra effort on behalf of a finance team to find this information. If management won’t correct problems by using this information, then it is more of a cost (in time) than it is a benefit (in solutions). 
  • Standard-setting:  Setting benchmarks and estimations could come from different sources and standards or even be affected by politics. So, when a variance is recorded, it may be possible that it doesn’t also result in useful information.  

How Automation Tools Can Help 

Variance analysis is based on numbers and data. When you have data spread out across spreadsheets and in different records within an organisation, then compiling and assessing data becomes tricky and timely. One of the challenges with variance analysis from the get-go is the timeliness of reporting, so this is where automation tools can come in to maximise efficiency. 

Automation tools such as  SolveXia  help to benefit variance analysis by providing:

  • Data integrity:  Allow the software to compile and store data that is unaltered, accurate and safe from errors. It also removes low-value manual tasks so staff can focus on high-value analytics to drive more significant insights and success.
  • Visibility:  Anyone who is granted access to an automation tool can take a look at the numbers themselves, which helps to improve transparency within a business. It provides real-time dashboards and real-time alerts so that variances that pose strategic risks or opportunities are flagged up as they happen, and the correct people are notified in real-time. This also improves compliance and enables processes to be mapped out, removing critical man dependency.
  • Timeliness:  Automation tools can collect, transform and process data in seconds. This means that information can be accumulated and shared much more quickly than when relying on it being done manually. Reports can be sent out by the system automatically to designated people, so the right people have the correct information at their fingertips. 
  • Connected data:  Data is connected and all in one place when it’s being stored in an automated software solution. It connects with all legacy systems, so everything is in one place to run analytics to gain more precise insights than ever before.

Download Now: How to Choose the Right Data Solution

Wrap Up: Measure to Manage 

Managing a business comes down to measuring inputs and outputs. By keeping track of budgets and actuals, you can utilise variance analysis to flag any significant fluctuations from what was otherwise expected. 

You can leverage automated software solutions like  SolveXia  to help store and manage data and information. These tools also help businesses thrive by maximising productivity and lowering costs. Automation solutions can quickly collect, transform and process mass amounts of data in seconds, relieving your team of having to perform time-consuming data entry and manual manipulation. With all data stored and centralised, you can standardise processes and automate workflows to reduce errors and adhere to compliance. There’s a lot you can accomplish when you include automation solutions into your day-to-day workflows. Stakeholders, customers and employees all reap the benefits of automation solutions.

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Analysis of Variance

  • First Online: 29 June 2023

Cite this chapter

business case study variance analysis

  • Klaus Backhaus 6 ,
  • Bernd Erichson 7 ,
  • Sonja Gensler 8 ,
  • Rolf Weiber 9 &
  • Thomas Weiber 10  

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Analysis of variance is a procedure that examines the effect of one (or more) independent variable(s) on one (or more) dependent variable(s). For the independent variables, which are also called factors or treatments, only a nominal scaling is required, while the dependent variable (also called target variable) is scaled metrically. The analysis of variance is the most important multivariate method for the detection of mean differences across more than two groups and is thus particularly useful for the evaluation of experiments. The chapter deals with both the one-factorial (one dependent and one independent variable) and the two-factorial (one dependent and two independent variables) analysis of variance and extends the considerations in the case study to the analysis with two (nominally scaled) independent factors and two (metrically scaled) covariates. Furthermore, contrast analysis and post-hoc testing are also covered.

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This is called inferential statistics and has to be distinguished from descriptive statistics. Inferential statistics makes inferences and predictions about a population based on a sample drawn from the studied population.

In our example, only 5 observations per group and thus a total of 15 observations were chosen in order to make the subsequent calculations easier to understand. The literature usually recommends a minimum of 20 observations per group.

On the website www.multivariate-methods.info we provide supplementary material (e.g., Excel files) to deepen the reader’s understanding of the methodology.

For a brief summary of the basics of statistical testing see Sect.  1.3 .

For a detailed explanation on degrees of freedom (df) see Sect.  1.2.1 .

The user can also choose other values for α . However, α  = 5% is a kind of “gold” standard in statistics and goes back to R. A. Fisher (1890–1962) who developed the F-distribution. However, the user must also consider the consequences (costs) of a wrong decision when making a decision.

The p-value can also be calculated with Excel by using the function F.DIST.RT( F emp ;df1;df2). For our application example, we get: F.DIST.RT(38.09;2;12) = 0.0000064 or 0.00064%. The reader will also find a detailed explanation of the p-value in Sect.  1.3.1.2 .

Guidance on testing the assumption of multivariate normal distribution is given in Sect.  3.5 . A detailed description of the testing of variance homogeneity using the Levene test is given in Sect.  3.4.3 .

The alpha error reflects the probability of rejecting the null hypothesis although it is true. For type I and type II errors, refer to the basics of statistical testing in Sect.  1.3 .

SPSS offers a total of 18 variants of post-hoc tests. See Fig.  3.16 in Sect.  3.3.3.2 .

Please note that the number of 5 observations per group, and thus a total of 30 observations, was chosen in order to make the subsequent calculations easier to understand. In the literature, at least 20 observations per group are usually recommended for a two-way ANOVA.

Here, the different types of interaction are illustrated graphically. The interaction effects in the application example correspond to those in the case study and are shown and explained in Fig.  3.15 .

For didactic reasons, the data of the extended example are also used in the case study (cf. Sect.  3.2.2.1 ; Table 3.9 ). Note that the case study is thus based on a total of 30 cases only. In the literature, a number of at least 20 observations per group is usually recommended.

For the types of interaction effects and the calculation of the interaction effect in the case study, see the explanations in Sect.  3.2.2.1 .

The p-value can also be calculated using Excel by using the function F.DIST.RT( F emp ;df1;df2). For the example in Sect.  3.2.1.1 , we obtain: F.DIST.RT(0,062;2;12) = 0.9402. A detailed explanation of the p-value may be found in Sect.  1.3.1.2 .

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Further Reading

Gelman, A. (2005). Analysis of variance—Why it is more important than ever. The Annals of Statistics, 33 (1), 1–53.

Ho, R. (2006). Handbook of univariate and multivariate data analysis and interpretation with SPSS . CRC Press.

Sawyer, S. F. (2009). Analysis of variance: The fundamental concepts. Journal of Manual & Manipulative Therapy, 17 (2), 27–38.

Scheffe, H. (1999). The analysis of variance . Wiley.

Turner, J. R., & Thayer, J. (2001). Introduction to analysis of variance: Design, analyis & interpretation . Sage Publications.

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Backhaus, K., Erichson, B., Gensler, S., Weiber, R., Weiber, T. (2023). Analysis of Variance. In: Multivariate Analysis. Springer Gabler, Wiesbaden. https://doi.org/10.1007/978-3-658-40411-6_3

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Inspired Economist

Budget Variance Analysis: A Detailed Overview on Financial Performance Measurement

✅ All InspiredEconomist articles and guides have been fact-checked and reviewed for accuracy. Please refer to our editorial policy for additional information.

Budget Variance Analysis Definition

Budget variance analysis is a financial analysis method that compares the actual financial outcomes with the budgeted figures to identify deviations, called variances. This process helps organizations understand their operational performance, identify potential problems, and take corrective actions to improve financial management.

Components of Budget Variance Analysis

Actual results.

Actual results represent the real, quantifiable outcomes from a given period, which may span from a quarter to a fiscal year. These are the actual expenses and revenues your company realized during this time frame. This is an essential part of budget variance analysis as it provides the real data you will compare with your predicted outcomes or budgeted results.

Budgeted Results

Simply put, budgeted results are the anticipated revenues and expenses of a business for a particular time frame. Before the beginning of a period, companies plan an estimated budget based on multiple factors such as past data, market analysis, predictions, etc. This approximation of revenues and expenses provides a goal for the teams to strive to meet.

The Variance

Variance is the difference between the actual results and the budgeted results. It reflects the numerical differences in individual budget items. It can be favorable if the actual revenues are higher than anticipated, or if the real expenses are less than expected. Conversely, a variance is unfavorable when revenues are lower than anticipated, or expenses are higher than expected.

Percentage Variance

Though the variance provides a numerical difference, the percentage variance is also critical because it offers more context to the difference. To calculate the percentage variance, divide the variance by the budgeted amount, then multiply by 100 to get the percentage. This component of the budget variance analysis helps businesses comprehend the magnitude of the variance and also allows for an easier and more meaningful comparison across different budget items or time frames.

Together, these components comprise a useful tool for businesses to monitor and control their financial operations, as well as to measure the effectiveness of their planning process.

Role of Budget Variance Analysis in Financial Management

Budget Variance Analysis plays a significant role in financial management by serving as a tool to conduct a periodical inspection of an organization's financial health. In essence, it evaluates the gap between an organization's planned financial outcomes and the actual results.

Role in Tracking Financial Performance

One of the primary roles of Budget Variance Analysis in financial management is tracking the performance of an organization based on its finances. This process is achieved by regularly comparing the projected budget against the actual expenses incurred. More often than not, the projected budget will vary from the actual expenses, and this variance can be either positive or negative.

A positive variance indicates that an organization's expenses are less than the projected budget, suggesting a favorable financial performance. Conversely, a negative variance, wherein the actual expenses exceeded the projected budget, signals a potential financial issue that needs immediate attention.

By reviewing these variances routinely, financial managers can promptly address financial discrepancies and implement necessary controls to mitigate further financial deviations. Essentially, Budget Variance Analysis serves as a diagnostic tool, offering an opportunity to analyze the discrepancies between the planned financial pathway and the actual financial state of an organization.

Role in Decision Making

More so, Budget Variance Analysis provides a solid basis for decision-making processes, especially for stakeholders. This analytical tool offers an insight into whether the existing financial strategy is working or if it requires adjustments. For instance, a recurring negative variance might imply the need for an overhaul in the financial strategy.

Budget Variance Analysis offers real-time, actionable intelligence to the stakeholders. It provides them insights about the areas where budget estimations are inaccurate and helps identify the factors causing the variance. Understanding these factors could assist stakeholders in deciding whether to change the strategy or continue with the current one.

Likewise, by evidencing the financial performance of an organization, the Budget Variance Analysis equips stakeholders with financial foresight, enabling them to make informed investment decisions, ensuring the company's growth and profitability.

In summary, Budget Variance Analysis is a crucial aspect of financial management, acting as a guidance tool for future business judgments and investment decisions.

Understanding Favorable and Unfavorable Variances

In the realm of budget variance analysis, variances are divided into two categories: favorable and unfavorable. The nature of these variances and their impact on a company's finances differ significantly.

Favorable Variance

Favorable variances paint a positive picture for a company's financial health. They occur when the actual revenues exceed the budgeted ones, or if the actual costs are lower than the budgeted costs. Essentially, a favorable variance suggests a company's financial performance is better than what was anticipated.

For example, if a company budgets $10,000 for its monthly marketing expenses and ends up spending only $8,000, this creates a favorable variance of $2,000. Here, the company's health is improved because it saved a sizable amount of money.

However, it's worth noting that not all favorable variances are a sign of positive financial health. There may be instances where a lower than planned expense could mean a missed growth opportunity or reduction in quality.

Unfavorable Variance

Unfavorable variances, on the other hand, present potential problems in a company's finances. These occur when the actual revenues are less than the budgeted amounts, or if the actual costs exceed the budgeted costs. Simply put, an unfavorable variance indicates a company's performance is not on par with its predictions.

For instance, if a company forecasts sales of $50,000 but actual sales come in at $40,000, they're looking at an unfavorable variance of $10,000. This could imply the company's financial health is not as strong as projected as its revenues have fallen short.

Similarly to favorable variances, context is important. An unfavorable variance isn't always an indicator of poorly performing financials. It may be caused by external factors that are outside of the company's control, such as a sudden increase in material costs or market downturns.

In summary, both favorable and unfavorable variances serve as tools for financial insight. They help in unraveling the performance of a company by comparing actual results with planned expectations. However, they should not be viewed in isolation but contextually, understanding the nuanced factors that contributed to the variances.

Types of Budget Variance Analysis

In the realm of budget variance analysis, four primary types are usually considered. These include sales variance, cost variance, material variance, and labor variance.

Sales Variance

Sales Variance is the difference between the actual sales and the budgeted or forecasted sales. In other words, if your organization predicted a particular level of sales for a given period and the actual sales either fell short or surpassed that forecast, you have a sales variance.

This variance is further categorized into two types:

  • Sales Price Variance: This is calculated by comparing the actual price at which goods or services were sold to the budgeted price.
  • Sales Volume Variance: Alternatively, this measures the difference between the actual quantity of an item sold and the budgeted amount.

Cost Variance

Cost Variance, as the name implies, is concerned with the difference between the actual cost and the budgeted cost of production or operations. A positive cost variance occurs when the actual cost is less than the budgeted cost. A negative cost variance reveals that the actual cost exceeds the budget.

Much like sales variance, cost variance can also be broken down into the following:

  • Direct Cost Variance: The difference between the standard cost of direct materials and labor, and the actual cost incurred.
  • Indirect Cost Variance: The variance between the standard cost of indirect materials, labor and expenses, and the actual cost incurred.

Material Variance

Material Variance measures the difference between the budgeted cost of materials and the actual cost of materials used in production. This type of variance helps organizations identify inefficiencies in their procurement process and wastage in material utilization.

Furthermore, material variance is divided into:

  • Material Price Variance: The difference between the standard cost and the actual cost for a given quantity of materials.
  • Material Usage Variance: Which relates to the difference between the standard quantity of materials expected to be used for the number of units produced, and the actual quantity of material used.

Labor Variance

Finally, Labor Variance represents the difference between the budgeted labor costs (amount of work hours at a certain pay rate) and the actual labor costs. This helps identify overtime issues, labor efficiency, and other potential labor-related concerns within a business.

Just like other variances, labor variance is split into:

  • Labor Rate Variance: Which is the difference between the budgeted hourly labor rate and actual rate paid.
  • Labor Efficiency Variance: Which measures the variance between the budgeted labor hours for actual output and the actual hours worked.

Computation of Budget Variance

The formula for budget variance.

The formula for calculating budget variance is quite simple:

Basically, you subtract the actual, really occurred value from the budgeted, planned cost or revenue. The result will either be a positive value, a negative value, or zero.

The Calculation Process

The calculation process of budget variance involves the following steps:

Step 1: Gathering the Data

The initial step involves collecting data on the actual income and expenses that occurred over the period you want to analyze. Alongside the actual figures, you also need to gather the forecasted or budgeted figures for the same time frame.

Step 3: Subtracting to Find the Variance

Once you have obtained both sets of data, subtract the budgeted number from the actual one. Follow the budget variance formula mentioned earlier to do so.

Step 4: Analyzing the Results

If the result of the calculation is zero, it means your actuals matched your budgeted amount perfectly.

A positive budget variance indicates that the actual income was higher than expected, or the actual expenses were less than anticipated. It's generally a good sign, but it might also state that you've set your targets too low.

A negative budget variance reveals that the actual income was lower than projected, or the expenses were higher. This result often points to a problem area, but it could also mean that your forecasts were overly optimistic.

Remember that budget variance analysis isn't about assigning blame for any discrepancies, but rather about identifying where operations might need to be altered to improve financial performance in the future.

Factors Affecting Budget Variance

There are several external and internal factors that can significantly affect budget variance.

Economic Fluctuations

Economic conditions play a significant role in budget variance. Inflation, recession, changes in interest rates and exchange rates can all impact an organization's financial performance, leading to differences between budgeted and actual figures. For example, during an economic downturn, companies might experience lower sales than budgeted. Conversely, during a period of economic growth, sales might exceed budget expectations, leading to a positive variance.

Changes in Market Trends

Market trends can greatly affect a company's revenue and expenses, and therefore its budget variance. New trends may increase demand for a company's products or services, leading to higher than expected sales and a favorable budget variance. On the other hand, a shift in consumer preferences away from a company's product could result in a negative budget variance. Similarly, changes in the competitive landscape, including new entrants or pricing strategies can also lead to variances.

Internal Organizational Changes

Internal changes within an organization can also lead to budget variances. This might include changes in company policy, introduction of new products or services, operational efficiency improvements, etc. For instance, if a company decides to use a new production technique that reduces costs, this could lead to lower than projected expenses and a favorable budget variance. Similarly, loss of key staff or less productive work hours could effectively lower outputs and lead to an unfavorable variance. Therefore, it is essential for companies to consider and anticipate these internal factors during the budgeting process.

Keep in mind that these factors, whether external or internal, are not isolated. They can intersect and interact in complex ways. For example, an economic downturn (an external factor) might spur a company to streamline its operations (an internal change), which could then affect the actual figures compared to the budgeted ones. Thus, a holistic approach is needed when performing budget variance analysis.

Implications of Budget Variance on Corporate Social Responsibility and Sustainability

Budget variance, by tipping the scales of planned expenditures, can have multiple implications on a company's Corporate Social Responsibility (CSR) and sustainability initiatives. These effects largely circulate around the unpredictability of expenses or savings and their potential impact on environmentally friendly activities and community services.

Unexpected Costs

When a budget variance results in unforeseen expenses, the allocation to CSR and sustainability may be jeopardized. Companies might be inclined to divert resources to areas that are closely linked with immediate business operations and profitability.

For example, funds intended for installing solar panels or other renewable energy sources might be reallocated to cover the unexpected costs. Similarly, new eco-friendly product development may be halted due to budgetary constraints.

Unanticipated Savings

Conversely, an unexpected savings through budget variance can provide a windfall for CSR and sustainability initiatives. This surplus could accelerate the transition to sustainable practices, fund new research for environmental-friendly processes, or amplify support for community projects.

For instance, unexpected savings could be channeled towards upgrading company facilities with energy-efficient equipment, enhancing waste management systems, or scaling up the scope of community development programs such as digital literacy classes or health clinics.

Balance between CSR and Sustainability

Navigating budget variance requires a balanced approach that does not undermine the commitment towards CSR and sustainability. Even when unexpected costs arise, companies should endeavor to maintain their social and environmental initiatives, as these long-term investments can significantly contribute to their reputation, stakeholder satisfaction, and ultimately, their business success.

Regular Analysis and Adjustment

Consequently, companies need to regularly perform budget variance analysis and adjust their financial plans accordingly. It involves taking proactive measures, like securing an emergency fund, to ensure that CSR and sustainability initiatives are never compromised. Furthermore, benefits arising from unexpected savings can be strategically invested to enhance their positive social and ecological impact.

In essence, dealing with the impact of budget variance on CSR and sustainability is all about maintaining a long-term perspective and fostering adaptability. Companies who manage this successfully not only ensure their own growth and survival, but also their relevance and respect in the societies they operate in.

Caveats and Limitations of Budget Variance Analysis

The drawbacks of budget variance analysis.

While budget variance analysis is a key weapon in your financial management arsenal, it's far from flawless. Perhaps the most obvious limitation is the potential for inaccuracy in your initial budget. If your original budget estimates were incorrect, the resulting variance analysis will, of course, be flawed.

Additionally, the static nature of budget variance analysis can be seen as a shortcoming. This tool doesn't adjust for changes in business or economic circumstances, as it reflects a point in time and doesn't take into consideration your company's dynamic environment. Thus, some unexpected business occurrences will typically remain unaddressed.

Variance Analysis is Not Prognostic

For all its benefits, it's crucial to recognize that budget variance analysis isn't a predictive tool. It doesn't provide insights into future markets or customer behaviors. It looks at financial deviations historically, without the capacity to forecast future financial situations.

Not Suited for All Types of Budgets

Another limitation lies in the fact that budget variance analysis may not be ideally suited to all types of budgets. It's most effective when applied to fixed budgets, where expenses are planned to remain stable. However, when it comes to flexible budgets that incorporate operational changes, variance analysis might create confusion and distortion.

Use In Conjunction with Other Tools

Finally, remember that budget variance analysis shouldn't be used in isolation. Relying solely on it could lead to a myopic view of your financial status. It's just one metric that gives you a snapshot of your financial performance—it doesn't offer a comprehensive view. Use variance analysis as part of a greater suite of tools, including cash flow analysis, balance sheet analysis, and profitability ratios among others, to get a well-rounded perspective of your financial status.

Remember, optimal financial management requires a multi-tool approach—don't rely solely on budget variance analysis to steer your financial decision-making.

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Cost Variance Analysis

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The Cost Variance Analysis note was written to provide students with fundamental concepts and methods for the analysis of cost variances. This note focuses on the decomposition of cost variances into…

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The Cost Variance Analysis note was written to provide students with fundamental concepts and methods for the analysis of cost variances. This note focuses on the decomposition of cost variances into price, quantity and mix variance components, an approach that allows students to identify the root causes of differences between expected and actual costs.

Oct 11, 2016 (Revised: Mar 16, 2022)

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business case study variance analysis

Variance Analysis

Variance analysis overview.

  • Variance Analysis is a vital technique used in Management Accountancy, providing a bridge between planning, controlling, and decision-making.
  • It involves the comparison of actual results with budgeted results.
  • It highlights the differences , or variances, between actual and expected results.
  • Variances can be favourable (F) , where the actual cost is less than the budgeted cost or unfavourable (U) , where the actual cost is more than the budgeted cost.
  • The main types of variances analysed are sales variance , material variance , labour variance , overhead variance , variable cost variance , and fixed cost variance .

Purpose of Variance Analysis

  • The main purpose of variance analysis is to control costs within an organisation.
  • It helps in performance measurement by showing where the company performed better or worse than planned.
  • It assists managers in understanding the cause and effect relationships between different business activities.
  • Variance analysis aids decision-making by providing insights into areas of overperformance or underperformance.
  • It can highlight where future planning and budgeting may need to be adjusted to be more accurate.

Calculation of Variances

  • Calculation of variances involves subtracting the budgeted costs from actual costs for each type of variance.
  • Every type of variance involves different formulas for calculation, e.g., sales variance can be calculated as (Budgeted Sales - Actual sales).
  • Unfavourable variances might indicate a need for corrective action – for instance, reducing costs or increasing sales volumes.

Use of Variance Analysis

  • Variances are typically reported in regular management reports , to help track and control performance.
  • Managers use this information to address areas of weakness or inefficiency and reinforce areas of strength.
  • Variances also serve as a diagnostic tool , to identify where the company’s strategy is working, or needs adjustment.
  • Lastly, they contribute to continuous improvement by identifying trends and providing insights into where changes can be made for better future results.

business case study variance analysis

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Case Study on Variance Analysis

Variance analysis case study:.

It is important to predict the whole sum of the difference in numbers in order to plan the further development of the company and improvement of its strategies due to these variances in expenditures. Variance analysis is extremely important for the small developing firms, because every extra sum of money is a plus and a chance for the further improvement.

Variance analysis is a useful practice which can make the development of business more rapidly and more effective, because if the company produces similar goods, it can predict the variance on all its production and use the extra money effectively.The topic on variance analysis is quite interesting and important for every future accountant. If one is asked to complete a successful variance analysis case study, he will have to read on the topic a lot to improve his knowledge on the problem under research. There are many reliable sources which can be at hand in the process of writing and help a student become aware of the aspects and principles of variance analysis. A student is supposed to investigate the topic professionally, collect the appropriate data for the research and draw the wise conclusions in the end. One should research the case site, discover the nature of the problem, find out about its cause and effect.

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A student is expected to brainstorm the effective solutions to the suggested problem on variance analysis to demonstrate his professional skills.The assignment of case study writing is treated like a complicated process of writing, because this paper has its own peculiarities and rules which have to be fulfilled. With the professional writing assistance of the Internet it is possible to prepare a good paper yourself if you take advantage of a free example case study on variance analysis. It is possible to complete a well­-organized assignment just having looked through a good free sample case study on standard costing and variance analysis in the prepared by an expert in the web.

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IMAGES

  1. Business Case Analysis: Definition, Format & Examples of a Case Study

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  3. (PDF) Case study using analysis of variance to determine groups’ variations

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  4. business case study variance analysis

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  5. STANDARD COSTING AND VARIANCE ANALYSIS Acc 2203 workshop

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  6. Standard costing and variance analysis case study

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VIDEO

  1. Note on Flexible Budgeting and Variance Analysis Case Study Help

  2. Statistics in Management

  3. Budgets and Variance Analysis

  4. Managerial Accounting

  5. Multiple Regression Models || Data Analysis and Modelling || Case Study (2015 and 2011 Spring)

  6. Principal Components Analysis (PCA) Tutorial Part 2/3: Projection and Variance

COMMENTS

  1. The Importance of Variance Analysis

    Two sources of such case studies are TRI Corporation and Harvard Business Publishing. Professors can introduce students to real-world applications of variance analysis by showing how it is used in investor relations (IR) pitches. As instructors, the two of us routinely search IR sites for applications of variance analysis.

  2. A Case Study of a Variance Analysis Framework for Managing Distribution

    This paper presents a comprehensive variance analysis framework developed by supply-chain managers at Catalyst Paper Corporation as a tool for reporting and controlling distribution costs. The model decomposes the overall static-budget variance into four primary variance categories: volume, customer mix, distribution mix, and carrier charges.

  3. Variance Analysis

    The Column Method for Variance Analysis. When calculating for variances, the simplest way is to follow the column method and input all the relevant information. This method is best shown through the example below: XYZ Company produces gadgets. Overhead is applied to products based on direct labor hours.

  4. Variance Analysis

    Variance Analysis Use Cases. While it is commonly associated with manufacturing and production processes, variance analysis can be applied to other key business areas such as marketing, sales ...

  5. Conduct Variance Analysis for Businesses [With Example & Formula]

    Let's take a look at the formula for positive convention: Actual Spending - Budgeted Spending = Variance. Negative convention calculates negative variances as negative values and positive variances as positive values. Here's the formula for negative convention in variance analysis: Budgeted Spending - Actual Spending = Variance.

  6. Variance Analysis: Understanding its Importance in Financial Management

    Variance Analysis Definition. Variance analysis is a financial and quantitative method used to identify and understand the degree of difference between actual and planned behavior in budgeting or financial accounting. It aids in determining the causes and degrees of variances, aiding organizations in decision making and performance improvements.

  7. How To Perform Variance Analysis

    CASE 2: Business Analysis Project B. Let X = No. of Business Analysts (Planned) = 5. Let Y = Number of Business Analysts Assigned (Actual) = 8 %age Variance = ((X - Y)/X)* 100 = (-3/5) * 100 = -60%. While a positive variance is not necessarily a bad thing (As seen in this case where less resources were used than planned), a negative variance is ...

  8. (PDF) VARIANCE ANALYSIS FOR FINANCIAL PERFORMANCE

    VARIANCE ANALYSIS FOR FINANCIAL PERFORMANCE. By Priscilla Osei and Sanghee Eum. Introduction to the study. Financial performance is a measure of how effectively a firm is able to use its assets to ...

  9. The Variance Analysis Cycle: Steps, formulas & tips

    The variance analysis cycle is a systematic process of comparing actual financial performance against planned or standard performance. ... In this case, the positive variance of $120 indicates that you overshot your budget by $120. ... We'll also be talking about exit opportunities, business partnering, cross-functional working, or moving ...

  10. Variance Analysis

    In this short revision video I explain the basics of variance analysis. ... Business news, insights and enrichment. Collections. Currated collections of free resources. Topics. Browse resources by topic. ... SAS Case Study 17th May 2015. Free CPD Webinar - Making Finance Fun ...

  11. Variance Analysis

    Variance analysis refers to identifying and examining the difference between the standard numbers expected by the business and the actual numbers achieved. This helps the company analyze favorable or unfavorable outcomes. In simple words, variance analysis budget studies the deviation of the actual outcome against the forecasted behavior in ...

  12. (PDF) VARIANCE ANALYSIS

    This chapter discusses variance analysis. A variance is the difference between planned, budgeted, or standard cost and actual costs. Variances can arise on both costs and revenues.

  13. What is Variance Analysis? Definition & Examples

    Variance analysis is a technique used in accounting and financial management to compare actual results with predicted or budgeted results. It involves analyzing the differences between the actual results and the planned or expected results to identify the reasons for the variances and take corrective action if necessary.

  14. What is Variance Analysis: A Frontier for Analysis

    A business uses variance analysis to find there is a $50,000 variance in one of its cost centres. To determine how and why this happened, it requires further variance analysis to understand if the difference came from price changes or a difference in the quantity of materials being used. Maybe it is a growing trend or a one-off event.

  15. Analysis of Variance

    Abstract. Analysis of variance is a procedure that examines the effect of one (or more) independent variable (s) on one (or more) dependent variable (s). For the independent variables, which are also called factors or treatments, only a nominal scaling is required, while the dependent variable (also called target variable) is scaled metrically.

  16. Budget Variance Analysis: A Detailed Overview on Financial Performance

    In summary, Budget Variance Analysis is a crucial aspect of financial management, acting as a guidance tool for future business judgments and investment decisions. Understanding Favorable and Unfavorable Variances. In the realm of budget variance analysis, variances are divided into two categories: favorable and unfavorable.

  17. A Case Study of a Variance Analysis Framework for ...

    This case study by Gaffney, Gladkikh and Webb (2007) encompassed the development of a comprehensive variance analysis framework for reporting and controlling distribution costs. Furthermore, Botes ...

  18. Cost Variance Analysis

    The Cost Variance Analysis note was written to provide students with fundamental concepts and methods for the analysis of cost variances. This note focuses on the decomposition of cost variances into price, quantity and mix variance components, an approach that allows students to identify the root causes of differences between expected and actual costs.

  19. Examining Cost Measurements in Production and Delivery of Three Case

    Examining Cost Measurements in Production and Delivery of Three Case Studies Using E-Learning for Applied Health Sciences: Cross-Case Synthesis ... Roush M. Managing activity costs with flexible budgeting and variance analysis. Account Horiz. ... (QMAF) on business outcomes. Int J Syst Sci Oper Logist. 2017 Jul 4; 6 (1):69-85. doi: 10.1080 ...

  20. Variance Analysis

    Variance Analysis is a vital technique used in Management Accountancy, providing a bridge between planning, controlling, and decision-making. It involves the comparison of actual results with budgeted results. It highlights the differences, or variances, between actual and expected results. Variances can be favourable (F), where the actual cost ...

  21. Case Study on Variance Analysis

    For You For Only $13.90/page! A student is expected to brainstorm the effective solutions to the suggested problem on variance analysis to demonstrate his professional skills.The assignment of case study writing is treated like a complicated process of writing, because this paper has its own peculiarities and rules which have to be fulfilled.

  22. Variance Analysis for Business Studies. Case Study Style Questions

    Variance analysis is the difference between planned and actual revenue, costs and profit. This pack contains 12 case studies in the style found in Business Studies examinations and coursework tasks. ; Suitable for A Level Business Studies IB Business Management BTEC Business Unit 13: Cost and Management Accounting. How to use this resource;

  23. Case study using analysis of variance to determine groups' variations

    In the case of crustaceans, West Bengal had high coefficient of variance (100) and Kerala had low coefficient of variance (19.50) for demersal group. Various kinds of skewed distribution could be ...