Budget vs. Actual Variance Analysis

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name: Budget vs. Actual Variance Analysis
description: Structures a variance analysis that isolates root causes behind budget gaps rather than restating numbers. Use when reporting monthly financials, presenting to the board, or diagnosing why a line missed plan.
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# Budget vs. Actual Variance Analysis

Variance analysis is diagnostic, not descriptive. A report that says revenue was 8% below budget is not analysis. Analysis says why, which team or product drove it, whether it is recoverable, and what it means for the full-year forecast.

## Set Up the Right Columns

The base table has five columns: Actual, Budget, Variance (Actual minus Budget), Variance Percent, and a one-line explanation. Add a YTD Actual and YTD Budget pair if the review is mid-year. Do not add a Prior Year column to the variance table — that belongs in a separate trend view. Mixing budget variance and year-over-year in one table confuses the reader.

## Materiality Threshold Before You Write

Define a materiality floor before writing any explanations. A reasonable default is the greater of 5% variance or a fixed dollar amount tied to total budget (e.g., 0.5% of monthly revenue budget). Variances below that threshold get no narrative. This discipline keeps the report focused on decisions, not accounting noise.

## Decompose Revenue Variances First

Revenue variances decompose into price, volume, and mix. Volume variance equals (actual units minus budgeted units) times budgeted price. Price variance equals (actual price minus budgeted price) times actual units. Mix variance is the residual when segment composition differs from plan. Identify which driver is largest before writing the explanation. A volume miss and a price miss have different remedies.

## Expense Variance Categories

Group expense variances into three buckets: timing (the spend happened, just not in this period), volume-driven (spend moved with a revenue or headcount driver), and structural (the cost base is different from plan regardless of volume). Timing variances resolve themselves and need a one-line note. Volume-driven variances need a rate check (is cost per unit in line?). Structural variances require a decision.
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