What Is Variance in Accounting? Definition, Types and Causes

Imagine reviewing your quarterly financial reports after setting targets across your enterprise, from production costs to sales.

However, when you compare the numbers, they don’t add up. Some costs were lower than expected, while others were higher. Sales didn’t meet your goals either, leading to discrepancies. 

This is where variance comes in – it helps you compare your planned numbers to the actual results to understand what steps you need to take to get back on track. In this article, we'll explain what variance is, why it’s important and the different types.

What Is Variance in Accounting?

In accounting, variance refers to the difference between an expected (or budgeted) amount and the actual amount. Enterprises make budgets based on estimates, but things don’t always go as planned. Variance is necessary to determine what exactly caused the difference. It helps enterprises track these differences and determine why they don’t match up, leading to a more accurate financial close and better forecasting

Let’s look at a simple example:

If you had planned to spend €20,000 on production costs but only ended up spending €18,500, the variance is €1,500. In this case, this is a good thing because you saved money.

However, variance can also be negative when expenses exceed expectations or revenue declines. For example:

If you had planned to spend €20,000 on production costs but ended up spending €22,500, the variance is €2,500. This is a negative or unfavourable variance because you spent more than expected, which means higher costs and lower profits.

What Causes Variance?

Some of the most common reasons enterprises see variances include:

• Material prices change: If raw materials get more expensive, costs go up.
• Sales go up or down: If a product sells better than expected, revenue variance is positive. If sales drop, revenue variance is negative.
• Unexpected costs occur: Things like equipment repairs, fines or emergency expenses can cause unfavourable variances.
• Production issues arise: If machines break down or materials go to waste, costs increase.

Favourable vs Unfavourable Variances

We mentioned positive and negative variances earlier. These are formally classified as:

• Favourable variance – This happens when costs are lower than expected, or revenue is higher than expected. It means the enterprise made or saved more money than planned.
• Unfavourable variance – This happens when costs are higher than expected, or revenue is lower than expected. It means the enterprise lost money compared to its plan.

Now, let’s go over the different types of variances according to the type of enterprise expenses:

Other Types of Variances

Besides favourable and unfavourable variances, there are other types depending on what part of the enterprise is being looked at:

1. Cost variance: The difference between expected and actual costs.
2. Revenue variance: The difference between expected and actual earnings.
3. Sales variance: When the number of sales or the price of products differs from expectations.
4. Labour variance: The difference between planned and actual labour costs.
5. Material variance: The difference in the cost of raw materials.

Each type of variance helps enterprises see where they’re doing well and where they need to plan better.

What Is Variance Analysis?

Variance analysis is a way to compare planned numbers to actual results. If there are big differences, finance teams must investigate the root causes.

For example, if your production costs suddenly jump, variance analysis can help you figure out whether material prices increased, workers took longer to finish tasks or there was some other problem. Once you have a clear picture of the problem, you can start to come up with solutions to fix it before it escalates.

How to Automate the Variance Process

Traditional variance analysis requires finance teams to manually compare budgeted figures, spreadsheets, and ERP data. With Aico, this process becomes fully automated and traceable.

In addition, manual variance is prone to human errors, which is not the case with sophisticated AI models for finance. Finally, it lacks real-time data because you have to calculate numbers only after transactions have been made.

Aico’s Variance Monitor can get rid of these setbacks and provide you with up-to-the-minute data on your finances. Some of the benefits you will gain include:

• Automatic calculations
• Real-time tracking
• Multi-source data imports
• Automated archiving and audit trail.

If you want to eliminate manual finance work altogether, book a live demo with us and see the benefits firsthand. 

Or you can always check out the Aico's unique feature and join the many that already benefit from it:

Final Words

Variance in accounting compares what an enterprise expected to happen with what actually occurred. Analysing variances helps you understand performance, control costs, and improve profitability.
Based on the result, you can have a favourable variance (things went better than planned) or an unfavourable variance (things didn't go as well as planned).

We suggest you start tracking and analysing variances in order to make better financial decisions, take control over costs and improve profits. For example, FP&A teams report spending nearly 45% of their time collecting data rather than analysing it, which underscores why timely and automated variance tracking is so valuable.

FAQs About Variance in Accounting

What is the payment variance meaning?

Payment variance refers to the difference between the amount a company expected to pay and the actual amount paid to suppliers or vendors. This can occur due to changes in prices, early or late payments, discounts or invoice errors. Tracking payment variance helps ensure financial accuracy and effective cash flow management.

What is adverse revenue variance?

When actual revenue falls short of expectations, this is known as an adverse revenue variance, and can signal potential issues in sales effectiveness, pricing or market demand.

Why is variance important in finance?

Variance is crucial in finance because it allows companies to spot discrepancies between what was planned and what actually happened. By analysing variances, organisations gain insights into performance, identify risks and make better strategic decisions that lead to improved profitability and tighter cost control.