Variance Analysis
Definition
Explaining the difference between actual results and the budget, forecast or prior period, and identifying what caused it.
Want a deeper explanation?
Formula
Variance = Actual − Budget (or Prior Period)Seeing a variance is easy; explaining it is the useful part. Good analysis breaks a change into price, volume and mix so you know what to fix.
Focus on the variances big enough to matter. Watch for: explaining every variance as timing, which can hide real changes in the business.
Example
Gross margin came in 3 points below budget. Variance analysis shows 2 points from a freight increase and 1 point from heavier discounting.