How can variance analysis help you identify differences between forecasted and actual results?

1 What is variance analysis?

Variance analysis is the process of measuring and explaining the differences between two sets of numbers, usually a forecasted or planned value and an actual or realized value. For example, you can compare your budgeted sales revenue with your actual sales revenue, or your projected cost of goods sold with your actual cost of goods sold. The difference between the two values is called a variance, and it can be either favorable or unfavorable, depending on whether it is positive or negative.

2 How to calculate variance analysis?

To calculate variance analysis, you need to have both a forecasted or planned value and an actual or realized value for the same period and category. Then, you can subtract the actual value from the forecasted value to get the variance. For example, if your budgeted sales revenue for the month was $100,000 and your actual sales revenue was $90,000, your variance would be -$10,000, which is unfavorable. You can also express the variance as a percentage of the forecasted value, which is called the variance percentage. In this case, the variance percentage would be -10%.

3 How to use variance analysis for business reporting?

Variance analysis can help you communicate your financial performance to your stakeholders, such as managers, investors, or creditors. You can use variance analysis to highlight the key areas where you met, exceeded, or missed your expectations, and explain the reasons behind the deviations. For example, you can use a variance report to show how your actual sales revenue, expenses, and profits compared to your budget, and provide commentary on the factors that influenced the results, such as market conditions, customer behavior, or operational issues.

4 How to use variance analysis for decision making?

Variance analysis can also help you improve your decision making in corporate finance. You can use variance analysis to evaluate your past performance, identify your strengths and weaknesses, and learn from your mistakes. You can also use variance analysis to adjust your future plans, set new goals, and allocate your resources more effectively. For example, you can use a variance analysis to determine whether you need to revise your sales forecast, reduce your costs, or increase your prices.

5 What are the types of variance analysis?

Variance analysis is a valuable tool to compare actual results with a budget, and there are several types of variance analysis that you can use. Static variance analysis looks at the original budget without taking any changes in assumptions or conditions into account. Flexible variance analysis, on the other hand, compares actual results with a revised budget, based on the actual level of activity or output. Additionally, sales volume variance measures the impact of differences in quantity of sales on revenue and profit, while sales price variance measures the impact of differences in price of sales on revenue and profit. Lastly, cost volume variance looks at the differences between actual and budgeted quantity of output on costs and profit, while cost price variance measures the impact of differences between actual and budgeted price of input on costs and profit.

6 What are the best practices for variance analysis?

To make the most of variance analysis, you should use realistic and relevant forecasts and budgets based on reliable data and assumptions. Additionally, ensure that your periods and categories are consistent and comparable to avoid inaccurate comparisons. Furthermore, select appropriate and meaningful variances that reflect your key performance indicators and objectives. Moreover, analyze and explain the variances, providing actionable insights and recommendations. Finally, monitor and review the variances regularly, updating your forecasts and budgets as needed. Variance analysis is a valuable technique for corporate finance which can help identify differences between forecasted and actual results for use in business reporting and decision making. By applying variance analysis, you can enhance your financial performance, accountability, and transparency.