The process of comparing actual financial results with budgeted or standard figures to identify, quantify, and explain the differences (variances).
Variance Analysis is a fundamental management accounting tool that compares planned performance against actual results. Variances can be: Favorable (actual is better than budget — higher revenue, lower cost) or Unfavorable/Adverse (actual is worse than budget). Key types include: Sales Volume Variance, Sales Price Variance, Material Price/Usage Variance, Labor Rate/Efficiency Variance, Overhead Spending/Efficiency/Volume Variance, and Budget vs Actual for each line item. The analysis follows a hierarchy: total variance → category (revenue/cost) → sub-category → individual items. Significant variances trigger investigation and corrective action. Best practice is to analyze variances monthly, with management review of variances exceeding a threshold (e.g., >5% or >₹1 lakh). Variance analysis drives continuous improvement and accountability.
Monthly P&L variance report: Revenue — Budget ₹50L, Actual ₹48L, Variance -₹2L (4% unfavorable, due to delayed project). Materials — Budget ₹15L, Actual ₹14L, Variance +₹1L (7% favorable, negotiated better prices). Salary — Budget ₹18L, Actual ₹19.5L, Variance -₹1.5L (8% unfavorable, overtime due to project deadline). Net Profit — Budget ₹8L, Actual ₹5.5L, Variance -₹2.5L (31% unfavorable).
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
Common rules: investigate variances exceeding 5–10% of budget OR above an absolute amount (e.g., ₹50,000). For critical costs (raw materials, labor), use tighter thresholds. For smaller line items, use wider thresholds. The cost of investigation should not exceed the potential benefit of correction.
For each significant variance: identify the root cause (not just the variance), assign responsibility to a specific person, define corrective action with deadline, track whether the variance is recurring or one-time, and update the forecast. Presenting variances without action items is just reporting — analysis requires the 'so what?' and 'now what?' answers.
A costing method that assigns predetermined (standard) costs to products and then compares actual costs against these standards to identify and analyze variances.
A financial plan that estimates income and expenses over a specific future period, used to guide spending and resource allocation.
A financial analysis tool that examines the relationship between costs, sales volume, and profit to determine how changes in any of these affect profitability.
The profit earned from a company's core business operations, calculated as revenue minus operating expenses, excluding interest and taxes.
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