Table of Contents
- 1 What is Variance Analysis Report?
- 2 Variance Analysis Formula
- 3 Sample Report of Variance Analysis
- 4 Most Commonly Used Variances
- 5 Reasons For Variances
- 6 Use of Variance Analysis Report
- 7 Problems With Variance Analysis
What is Variance Analysis Report?
Variance Analysis Report is useful to identify the gap between the planned outcome (The Budgeted) and the actual outcome (The Actual). The gap between Budget and Actual called the “Variance”.
Variance Analysis Formula
A formula for variance analysis is as under:
Variance = Budgeted cost/income – Actual cost/income
Favorable variance (positive; better than planned)
Adverse variance (negative; worse than planned)
Sample Report of Variance Analysis
To: Board of Directors
From: Executive Director, Association for Better Community, Inc.
Date: June 15, 2018
Subject: Actual vs Budget Variance Report
1 Jan to 30 Apr
1 Jan to 30 Apr
Variance analysis report also contains explanation for each variance.
Purchase expenses are increased due to lower supply of raw material used in production.
You can view a sample of variance analysis pdf report in below reference link.
Most Commonly Used Variances
Purchase Price Variance
Purchase price variance results when actual price which is paid for materials is more/less than the budgeted cost for such materials.
Labor Rate Variance
Labor rate variance results when the actual price which is paid as wages is more/less than the budgeted cost for wages. For instance, labor is paid at $ 10 per hour, but are paid at $ 12 in actual.
Material Yield Variance
This shows the actual quantity of material used and the standard quantity expected to be used in the course of production, multiplied by the standard cost of such materials.
Volume variance means actual quantities sold or consumed and budgeted quantity expected to be consumed or sold, multiplied by the standard price per unit.
Reasons For Variances
- Change in market conditions, which have rendered the standard budgeting practices unrealistic. e.g. short supply of raw materials causing suppliers to hike prices.
- Budgeting standards followed may be too idealistic in nature. e.g. the output of a machine may be wrongly assumed.
- Service delivery may not be up to the mark. e.g. planning may have taken into account an eight-hour working day, however actual ground conditions may only allow six hours a day.
- In certain cases, there can be no basis for planning. e.g. the output of creative activities cannot be benchmarked to a high level of accuracy.
Use of Variance Analysis Report
Making Future Decision
Variance analysis report helps management to make the future decision like deciding the price of the product. Suppose variance analysis shows that cost cannot be decreased then management may increase price of the product.
Identify Area of Improvement
Variance analysis report helps the management to identify the area in which a company can improve. So, management can Find ways to decrease cost or increasing sales & ultimately helping a company in increasing the profitability of the business.
Managers use variance analysis to measure and analyze what has already occurred in the company’s activity. Understanding what has hindered or helped the company in its actual performance. It helps management decide what policies and procedures should be modified and how.
Problems With Variance Analysis
Due to the periodical preparation of variance analysis report, it is not of much use in a fast-paced environment compared to other tools. Therefore the management has to rely on other measurements that are generated on the spot.
Variance Source Information
Generally, reasons for variance are not recorded in financial records. Thus the management has to identify reason from different sources such as bills of material, overtime records to determine the cause of the problems. Hence the source of information is important.
Variance analysis is essentially a comparison of actual results to an arbitrary standard that may have been derived from political bargaining. Consequently, the resulting variance may not yield any useful information.1–4