Imagine you're reviewing your financial reports at the end of the quarter. You had set targets for every aspect of 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.
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.
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, in some instances, the variance can be negative if you end up losing revenue. 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.
Some of the most common reasons enterprises see variances include:
We mentioned positive and negative variances earlier. They are officially known as:
Now, let’s go over the different types of variances according to the type of enterprise expenses:
Besides favourable and unfavourable variances, there are other types depending on what part of the enterprise is being looked at:
Each type of variance helps enterprises see where they’re doing well and where they need to plan better.
Variance analysis is a way to compare planned numbers to actual results. If there are big differences, enterprises need to figure out why.
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.
Manual variance has a lot of setbacks, but most of all, it is time-consuming. It requires utmost attention, and the tiniest errors can cause huge discrepancies, presenting a misleading view of your finances.
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:
If you want to eliminate manual finance work altogether, book a live demo with us and see the benefits firsthand.
Let’s take a look back: What is variance in accounting? Variance in accounting is all about comparing what an enterprise expected to happen vs what actually happened from a financial perspective. When the numbers don’t match up, you need to figure out why, and variance is the easiest way to do that.
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.