What is Variance Analysis
Variance analysis is the investigation of differences between planned results against actual results.
Generally planned results are based upon reasonable estimates, so some level of difference will tend to exist. Variance analysis is therefore only undertaken where differences are unexpected or above a certain set level.
An Example of Variance Analysis
A business has budgeted for marketing costs in the month of February of £1,650 which was based on the following estimated costs:
- Marketing assistant £750
- Facebook Ads £450
- Printed flyers & flyer drop £450
When the accountant returned the management accounts for February, actual marketing costs for the month were £2,500 – a variance of £850 or 34%.
Upon investigation it was discovered that a marketing subscription had been set up for £450 per month and the daily spend on facebook ads has been set up incorrectly meaning that £950 had been spent instead of the budgeted £450.
Why is Variance Analysis So Important
In the above example of variance analysis the business was quickly and easily able to see that marketing costs were much higher than estimated and can now take steps to:
- Cancel the marketing subscription if not required and find out how it was set up;
- Update the budget to include the cost of the new marketing subscription if it is required;
- Correct the mistake made in setting up the facebook ad and reduce the daily spend limit.
By analysing variances a business is able to nip unexpected spending in the bud sooner rather than later, saving money. Variance analysis can be favourable as well as unfavourable but by monitoring the results of a business strategic, timely, decisions can be made.