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Home / Accountant Library / Glossary / Costing and variances

Variance analysis

In one sentenceComparing actual results with the budget or with standard costs line by line, then explaining each difference by its causes and identifying who is responsible.

Simply put

You take the actual income statement, place it next to the budget, and calculate the difference for each line. Then you ask: why did this difference happen? Did the price, the quantity or the efficiency change?

The benefit is knowing where to step in: a material price difference belongs to purchasing, a labor hours difference belongs to production, and a shortfall in quantities sold belongs to sales.

Worked example

A spare parts store estimated annual sales at 500,000 SAR and costs at 300,000 SAR; actual sales came to 470,000 SAR and costs to 290,000 SAR.

Sales variance470,000 − 500,000 = −30,000 (unfavorable)
Cost variance290,000 − 300,000 = −10,000 (favorable)
Estimated profit500,000 − 300,000 = 200,000 SAR
Actual profit470,000 − 290,000 = 180,000 SAR
Net effect of variances on profit20,000 SAR unfavorable

Formula: For each line: Actual − Estimated, then explain the difference by its causes

Don't confuse it with

VarianceThe variance is the resulting figure; the analysis is the steps that explain and break it down.

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