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What are some methods for analyzing budget variances?

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Budget variances are the differences between the planned and actual costs or revenues of a project. Analyzing budget variances can help you identify the causes and effects of deviations, evaluate the performance and efficiency of your project, and make adjustments or improvements as needed. In this article, you will learn some methods for analyzing budget variances in the context of project leadership.

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Eligio Cardona
John Ong

Data Analyst

1 Define budget variance categories

When analyzing budget variances, the first step is to define the categories you want to measure and report. Depending on your project scope, objectives, and stakeholders, you may use different categories such as variance by activity, task, or deliverable to show how much each component of your project contributes to the overall variance; variance by time period to show how your project performs over a certain period; variance by responsibility to show who is accountable for the variance; and variance by source to show where the variance originates from. Additionally, you can combine or subdivide these categories to create more detailed or customized reports.

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Eligio Cardona
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1. Fixed overhead spending variance 2. Labour rate variance 3. Variable overhead spending variance 4. Purchase price variance 5. Material yield variance 6. Labour efficiency variance

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2 Calculate budget variance amounts

The next step in analyzing budget variances is to calculate the amount of variance for each category. The basic formula for calculating budget variance is: Budget variance = Actual amount - Budgeted amount A positive budget variance means that you spent less or earned more than planned, while a negative budget variance means that you spent more or earned less than planned. You can also express the budget variance as a percentage of the budgeted amount, which can help you compare the relative magnitude of variances across categories.

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John Ong

Data Analyst
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When calculating budget variance, take note of what are the relevant costs to look at, and omit irrelevant costs. This is especially for allocated costs which are out of the control of the employees in a team, department, division etc. Some of these are overheads which are equally divided across departments, teams etc. regardless of size, responsibilities or involvement. This is important because the purpose of budget variances is to help the organization realise what are the inefficiencies or ineffective areas that could be improved on, thus only relevant variances should be investigated and pursued, or else there will be a waste of resources and morale might be hurt as well.

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3 Analyze budget variance causes

The third step in analyzing budget variances is to identify and evaluate the causes of the variances. These can range from changes in scope, requirements, or specifications, to errors or inaccuracies in budgeting, to external or internal factors. For example, external factors could include market fluctuations or regulatory changes, while internal factors could include operational inefficiencies or staff turnover. To analyze the causes of budget variances, you can use tools such as variance analysis, root cause analysis, or fishbone diagrams. This will help you understand and address the issues that are leading to the variances.

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John Ong

Data Analyst
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One important thing to note for analysis is that while the team, department, division etc. involved needs to investigate and understand the causes of the variances, there should be an independent entity to the analysis results and put things in perspective. This could be the finance department checking the reasonableness and relevance of other departments, for reporting purposes, or the internal audit team checking the overall analysis results, making further investigations if necessary. The ultimate result of the analysis should be to find ways to improve the organisation going forward, no matter what the causes are, be it internal, external, controllable or not, or others.

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4 Assess budget variance impacts

Assessing the impacts of budget variances on your project performance, objectives, and stakeholders is the fourth step in analyzing budget variances. To do this, you can ask questions such as: how significant is the variance in terms of amount, percentage, frequency, or trend? How does it affect the quality, scope, schedule, or risk of your project? Additionally, how does it affect the satisfaction, expectations, or feedback of your project stakeholders? And how does it affect the profitability, cash flow, or return on investment of your project? You can also use various tools and techniques to assess the impacts of budget variances such as performance indicators, dashboards, or balanced scorecards.

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John Ong

Data Analyst
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One thing to note is the absolute impact (e.g. dollar amount) the budget variance has on the organisation, but more importantly is the trend and how frequent it is. For example, if there is a new 10-year project that already started to have negative budget variances in the first month, and one which doubled month by month, to the current state of 3 months, this is way more urgent to look at than a large one-time variance (e.g. due to write off of obsolete inventory). Another thing to consider is how will it affect the stakeholders, especially those directly related to upper management? Some budget variances have qualitative aspects to them, so it is important to gauge the interests and respond to them accordingly.

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5 Communicate budget variance results

The fifth step in analyzing budget variances is to communicate the results of your analysis to the project stakeholders, such as the sponsor, client, team, or management. This is to inform them of the current status and progress of your project budget, explain the reasons and implications of the budget variances, seek feedback or input, and align the stakeholders on the next steps or actions to take. Various tools and techniques can be used to communicate the results of your budget variance analysis, such as reports, presentations, or meetings.

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6 Implement budget variance actions

The final step in analyzing budget variances is to implement the actions that you have decided or agreed upon with your project stakeholders to address the variances. These actions could involve revising or updating the project budget to reflect the actual or expected costs or revenues, adjusting or reallocating project resources, scope, or schedule to optimize efficiency or effectiveness, resolving or mitigating the issues or risks that caused or resulted from the budget variances, and improving or enhancing project processes, systems, or controls to prevent or minimize future budget variances. Various tools and techniques can be used to implement these budget variance actions, such as action plans, change requests, or lessons learned.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are some methods for analyzing budget variances?

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1 Define budget variance categories

2 Calculate budget variance amounts

3 Analyze budget variance causes

4 Assess budget variance impacts

5 Communicate budget variance results

6 Implement budget variance actions

7 Here’s what else to consider

Project Leadership

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What are some methods for analyzing budget variances?

1

2

3

4

5

6

7

1 Define budget variance categories

2 Calculate budget variance amounts

3 Analyze budget variance causes

4 Assess budget variance impacts

5 Communicate budget variance results

6 Implement budget variance actions

7 Here’s what else to consider

Project Leadership

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