What Is Variance Analysis?
How managers compare plans with results, with favourable and adverse examples.
Home › Accounting Glossary › Variance Analysis
| Basic formula | Variance = Actual − Budget |
|---|---|
| Common types | Sales, material, labour and overhead variances |
| Topic | Management accounting · Control |
Variance analysis in plain English
A budget is a plan. Variance analysis checks how reality compared with the plan and asks why. Whether a difference is good or bad depends on whether it is revenue or cost.
Worked example
| Item | Budget | Actual | Variance |
|---|---|---|---|
| Sales | 20,000 | 22,000 | 2,000 favourable (higher revenue) |
| Material cost | 5,000 | 5,600 | 600 adverse (higher cost) |
Higher sales help profit, so that variance is favourable. Higher material cost reduces profit, so that variance is adverse.
- Treating every adverse variance as bad without finding the cause. Higher material cost may come from higher sales volume.
- Mixing up the sign. A higher actual cost is adverse, but a higher actual revenue is favourable.
Frequently asked questions
What is a favourable variance?
A difference that increases profit compared with the budget, such as higher revenue or lower costs.
What is an adverse variance?
A difference that reduces profit compared with the budget, such as lower revenue or higher costs.
Who uses variance analysis?
Managers use it to control costs, find problems early and judge performance against plan.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.