Variance analysis

Meaning

Variance analysis (تحليل الانحرافات) sets what actually happened beside what was budgeted and asks why they differ. A variance is favourable when it improves profit (more revenue or lower cost than planned) and unfavourable when it reduces it. The size alone is not the point: a small unfavourable variance on a large, controllable cost can matter more than a large one nobody could have prevented.

Cost variances are usually split in two. A price variance shows paying more or less per unit than planned; a quantity or usage variance shows using more or fewer units. Splitting them points to who can act: purchasing for price, operations for usage. Run monthly, per project or cost center, it turns the budget from a document into a control.

Also called: budget variance · budget vs actual · favourable variance · unfavourable variance · تحليل الانحرافات

Example

Al Noor budgeted 10,000 kg of packaging at 4.00 a kg, 40,000.00 in all, but used 10,500 kg at 4.20, 44,100.00. The 4,100.00 unfavourable variance splits into a price variance of 2,100.00 (10,500 kg × 0.20 more per kg) and a usage variance of 2,000.00 (500 kg more × 4.00): half for purchasing to explain, half for the warehouse.