Variance Report

What Is A Variance Report?

A variance report is a written document identifying the differences between budgeted and actual performance. Also known as a budget variance report, its primary purpose is to detect any deviations from the initially prepared budget.

It is essential to financial planning and analysis (FP&A) and corporate finance. It aids in understanding overspending, facilitates accurate reporting, and provides a basis for decisions such as cost-cutting and revenue enhancement. The significance of variance reports is not limited to corporate finance; they are also visible in the healthcare sector.

• A variance report is a written document that compares budgeted items with actual figures, commonly used in sales, finance, and marketing departments.
• Different types of variances exist, including purchase price, overhead, sales, labor, and usage variance, each with its unique interpretation.
• A positive variance might signify high sales in a specific period and could also indicate that expenses are lower than the budget.
• The report is valuable for analyzing business trends and detecting gaps within financials. However, delays in report development may obscure fraudulent activities.

Variance Report Explained

The variance report is a vital component of corporate finance, serving as an essential tool to compare the pre-planned budget with actual performance. For instance, if a firm earns less revenue than budgeted, it may lead to increased spending, resulting in decreased cash inflows and increased outflows. This analytical tool contributes to effective cost and budget management and aids in communicating company performance to stakeholders.

Budget variance reports are prevalent in sales, finance, and marketing departments. They help identify gaps between actual and expected outcomes, allowing companies to address areas that need improvement. Failure to manage these variances can impact overall performance, potentially leading to financial losses and bankruptcy. Regular or monthly preparation of this report depends on the type of budget variance and the resolutions implemented.

Different types of variance reports exist, including the purchase price variance report, usage variance, and labor and overhead variance. Each type focuses on specific elements of the cost sheet. For instance, the purchase price variance report highlights differences between the actual supplier payment and the standard cost. Similarly, labor and overhead variances analyze differences between actual wages/prices and standard rates, while usage variance examines gaps in resource utilization, each serving a distinct purpose.

Examples

Let us look at a few examples of variance reports for a better understanding of the concept:

Example #1

Suppose Samuel owns a company that operates in the textiles industry. It has been around 10 years since the firm started performing better in the market. However, in the past few months, the performance has dropped drastically. As a result, Samuel appointed Kevin as a cost controller to create an Excel variance report on the sales and finance for this quarter. Thus, the latter started working on it and developed a report. 

The sales report states that the actual budget for the quarter was $10 million. However, the revenue generated was only $8 million. Likewise, the price variance analysis showed how the firm spent more cash on raw materials. As a result, Samuel thought of a solution for improving this graph. 

Samuel recreated a new budget for each department by analyzing the past budgets. Also, he introduced a regular checkup of such variances every month. It was a small yet impactful attempt to shield future performance. After a few months, the company saw a huge revenue boost and reduced expenses. 

Example #2

According to a recent news update as of December 2023, the executive search firm ON-Partners released its variance report for 2023. They have gained experience in curating C-level and board teams. Also, this report has shown positive variance. As per Tim Conti, Co-President, the firm has performed well in every aspect and region. 

The report suggests the company's expansion, leading to more transparency and data innovation. Also, the expectations of C-level executives on median compensation (salary) rose by 11%. And as the company grew, the actual number surged from 13% to 40%. 

Sample

Let us look at a sample Excel variance report:

Income Statement Budget Variance Report
Metric	Budget	Actual	Variance	Favorable/Unfavorable
Revenue	1000	900	100	Unfavorable
Expense	600	550	50	favorable
Net Income	400	350	50	Unfavorable

Advantages And Disadvantages

Let us also look at the advantages and disadvantages of this analysis method:

Advantages:

• Identification of Performance Gaps: The report effectively helps identify any performance gaps.
• Opportunity for Business Strategy Improvement: It provides ample opportunities to enhance business strategies.
• Detection of Financial Crimes: Major divergences in the report can aid in detecting potential financial crimes or fraud.
• Monitoring Efficiency and Resource Use: It facilitates monitoring efficiency and the effective utilization of resources such as time and money.

Disadvantages:

• Time-Consuming Analysis: Examining the impact of each variance can be time-consuming.
• Risk of Concealing Poor Performance: Any delay in report creation may obscure poor company performance.
• Sensitivity Analysis Impact: Sensitivity analysis may influence and affect the actual outcome.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to what is a Variance Report. Here, we explain its examples, samples, advantages, and disadvantages. You can learn more about financing from the following articles –

• Variance In Accounting
• Covariance Formula
• Sales Volume Variance