What is Variance Analysis?

June 28, 2022

What is Variance Analysis?

Variance analysis is the process of analyzing business processes and performance results to identify variances from a standard or budget. This can include cost, schedule, quantity, and other metrics. Variance analysis is important because it allows you to uncover trends in your business, both positive and negative, and make proactive changes before an entire department or company is affected by those trends.

In this brief article, we will explore the ins and outs of variance analysis and answer some fundamental questions such as what is a variance analysis? What are some examples of variance accounting? What are the four steps in variance analysis? And much more.

What is a variance analysis?

Variance analysis is a tool used to identify and measure the causes of differences between actual and budgeted performance. A variance analysis report can help you assess the performance of a business by identifying areas where it may be able to improve its results. Variance analysis can also be used as part of an overall strategy evaluation, helping you determine the effectiveness of your policy or plan in achieving its goals.

Variance analysis formula

Variance = Actual Income/Expense – Budgeted Income/Expense

Why is a variance analysis important?

Variance analysis is important because it helps you to understand what causes your business to operate differently from its plan. For example, if you’re a company that sells products online, you might have a plan for how many customers will purchase your products each month. However, if your actual sales don’t match up with your plan, then variance analysis can help you figure out why.

By looking at variances between when your actual numbers are lower or higher than expected, you can identify areas where you can improve. This can help you prevent overspending or underperforming in the future and make sure that your business stays on track by focusing on what really matters!

Here is a free template showing how you can track Budget vs Actuals with a Variance analysis using Liveflow.

What are some examples of variance analysis?

There are countless examples of variance analysis that you can find online, but to illustrate the point, consider these two basic variance accounting examples.

1. A company that buys supplies for its manufacturing processes might run a variance analysis on the price of its raw materials, comparing the actual price paid with the expected price. This would help it determine whether it was getting a good deal on its raw materials and could potentially identify suppliers who are overcharging or underpaying.

 

2. A mail-order company might run a variance analysis on its shipping costs, comparing the actual cost of shipping with the expected cost based on historical data and current rates. This would help them to identify any changes in their shipping costs that should be investigated further, for example, if they had recently switched carriers and are now seeing higher fees than usual.

What are the four steps in a variance analysis?

There are several different methodologies used when conducting variance analysis, but for the sake of simplicity, you can use these four steps to conduct your own variance analysis in a wide variety of different situations that you are likely to encounter in business and elsewhere.

Step 1: Identify the problem by asking what is different, what has changed, and why.

Step 2: Identify the cause of the problem, which may have been the result of a change in circumstances or an error in judgment.

Step 3: Determine if there is a way to fix the problem by investigating how long it will take to return to normal and how much it will cost to do so based on your financial goals and risk tolerance (i.e., conservative vs. aggressive).

Step 4: Decide whether or not you should accept this new status quo as your baseline for future project planning or continue trying harder until you achieve your original goal.

Summary

Variance analysis is the process of investigating the difference between two results. In business, a variance analysis report is used to identify ways in which budgets and actual costs differ and helps you to get a better understanding of what has caused these differences. It also helps companies plan for future spending by estimating how different factors will affect their expenses.

At the end of the day, it’s important to have realistic estimations of your income and expenses so that your company can stay profitable and correct any issues that may arise throughout the course of conducting business.

Recommendation

If you are not particularly fond of conducting analysis, or if you simply don’t have time to manage all of your accounting tasks manually, then consider using a cloud-based tool to handle your accounting processes. There are several good apps on the market for this, such as Causal, Pry, and LiveFlow.

LiveFlow makes accounting easier than ever before, plus it connects seamlessly with your other bookkeeping tools like QuickBooks and Google Sheets. So, before you delegate your variance accounting tasks to somebody else, which will certainly cost you a small fortune, be sure to check out LiveFlow and its Budget vs Actuals Template and see if it might work for you.

An example of variance analysis using Liveflow

Continue reading

Set your financial reporting on autopilot. Goodbye manual work.

Eliminate manual data entry and create customized dashboards with live data.