Most people are familiar with what an actual to budgeted/plan variance analysis looks like. Related: FP&A Job Description and Responsibilities The classic: budget to actual variance Given the very ad hoc nature of variance analysis, spreadsheets are a very useful tool.
Most enterprise systems have some type of standard variable reporting capability, but they often do not have the flexibility and functionality that spreadsheets provide. Most variance analysis is performed on spreadsheets (Excel) using some type of template that’s modified from period to period. If the organization utilizes a driver-based, flexible budget or plan where production costs come in higher in a period due to increased sales volume, than that may have a positive effect on organizational profit and show that in the budget to actual variance analysis. In addition, variances are relative to an organization’s key performance indicators (KPIs). For example, expenses may have come in higher than planned, but that produces a negative variance to profit. When explaining budget to actual variances, it is a best practice to not to use the terms “higher” or “lower” when describing a particular line time. Negative variance: Actuals came in worse than the measure it is compared to.Favorable variance: Actuals came in better than the measure it is compared to.Variances fall into two major categories: Performing budget to actual variance analysis monthly, quarterly, annually) in enough detail to allow managers to understand what’s happening to the business while not overburdening staff. Most organizations perform variance analysis on a periodic basis (i.e. The basis of virtually all variance analysis is the difference between actuals and some predetermined measure such as a budget, plan or rolling forecast. Are variances being caused by execution failure, change in market conditions, competitor actions, an unexpected event or unrealistic forecast?.Why are selling, general and administrative expenses higher than last year?.Why did one division, product line or service perform better (or worse) than the others?.The purpose of all variance analysis is to provoke questions such as:
A budget to actual variance analysis is a process by which a company’s budget is compared to actual results and the reasons for the variance are interpreted.
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