# How do you explain financial variances?

## How do you explain financial variances?

Budget variance equals the difference between the budgeted amount of expense or revenue, and the actual cost. Favourable or positive budget variance occurs when: Actual revenue is higher than the budgeted revenue. Actual expenses are lower than the budgeted expenses.

## What does variation mean in accounting?

A variance is the difference between an actual measured result and a basis, such as a budgeted amount. In many accounting applications, a variance is considered to be the difference between an actual cost and a standard cost. Variance reporting is used to maintain a tight level of control over a business.

What are variations in a budget?

A budget variance is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount. The budget variance is favorable when the actual revenue is higher than the budget or when the actual expense is less than the budget.

What are the 3 variances?

The three-way analysis shows the difference between the total actual factory overhead and total standard factory overhead costs split into three components: spending variance, efficiency variance, and volume variance.

### How do you analyze variance?

How to perform a cost variance analysis

1. Determine the simple cost variance.
2. Find the source of the difference by comparing expenses.
3. Calculate materials cost variance.
4. Calculate labor cost variance.
5. Calculate sales variance.
6. Check cost variances and report findings.
7. Develop a plan to align actual costs with budgeted costs.

### What is better a positive or negative variance?

A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, indicating losses or shortfalls. Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy.

How do I calculate variation?

Steps for calculating the variance

1. Step 1: Find the mean.
2. Step 2: Find each score’s deviation from the mean.
3. Step 3: Square each deviation from the mean.
4. Step 4: Find the sum of squares.
5. Step 5: Divide the sum of squares by n – 1 or N.

How do you calculate variance in finance?

The other way to look at financial variance is as a percentage of the budget for that item. To get the percentage, divide the raw dollar-amount difference by the amount budgeted, and then subtract 1 from the result.

## What are the types of variances?

There are four main forms of variance:

• Sales variance.
• Direct material variance.
• Direct labour variance.