1.5 Variance Analysis

Time: ~20 minutes

What You'll Learn

• How to calculate and categorize variances (favorable vs. unfavorable)
• Root cause analysis — why the numbers differ from the plan
• The difference between volume, price, and mix variances
• How to present variance findings without finger-pointing

Key Concepts

What Is Variance Analysis?

Variance analysis compares what you planned (the budget) to what actually happened (the actuals). The difference is the variance. Simple in concept, powerful in practice.

• Favorable variance — You did better than planned (higher revenue or lower costs)
• Unfavorable variance — You did worse than planned (lower revenue or higher costs)

But the label alone isn't enough. A "favorable" cost variance might mean you underspent on marketing — which could actually be bad if it means you're not investing in growth.

Types of Variances

Most variances break down into three components:

• Volume variance — You sold more or fewer units than planned
• Price variance — You sold at a higher or lower price than planned
• Mix variance — The proportion of products/services shifted from what was planned

Understanding which component drove the variance tells you very different stories and requires very different responses.

The "So What?" Test

Every variance needs to answer: "So what should we do about it?" A variance report that just lists numbers is useless. A good one identifies the cause and recommends action.

What You'll Do

In this lesson, you'll:

1. Compare your budget projection against actual results
2. Calculate variances by category and identify the largest gaps
3. Decompose key variances into volume, price, and mix components
4. Identify root causes for the most significant variances
5. Write actionable variance commentary

How to Start

start lesson 1.5

Your AI will provide actual results to compare against your budget, then guide you through the analysis.

Skills You'll Use Later

• Variance calculations (included in financial summaries in 1.6)
• Root cause analysis (essential for credible financial reporting)
• Actionable commentary (the skill that separates analysts from spreadsheet operators)