How to calculate variance analysis

Written by kaye morris
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At the end of an accounting period, a variance analysis is performed for management review to identify areas of operation that are not meeting normal or budgeted goals. Management uses the information to research the problems that create these variances so that changes can be made to improve operations. One form of variance analysis compares actual accounting figures, such as income and expense, to budgeted accounting figures. Another form of variance analysis compares actual accounting figures for the current operating month to the accounting figures for the prior month.

Skill level:
Easy

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Instructions

  1. 1

    Create a spreadsheet on paper or using spreadsheet software.

  2. 2

    List each account that requires variance analysis down the first column on the left side of the spreadsheet.

  3. 3

    Input the actual accounting figures for the current month for each account in the second column on the spreadsheet.

  4. 4

    Input the budgeted accounting figures for the month, or the actual accounting figures for the previous month, in the third column.

  5. 5

    Subtract the budgeted or previous month’s figures from the current month's actual figures (subtract column three from column two) to get the variance amount. Enter that amount in the fourth column.

  6. 6

    Divide the variance amount by the budgeted or previous month's actual figure in column three to get the variance percentage change. Enter that amount in column five. Make sure you enter the number as a positive or negative number as calculated.

Tips and warnings

  • Review both variance analysis reports to identify large percentage changes in accounting figures. Research each large variance to ensure that all the accounting information was reported correctly and to create a plan for operational changes to improve performance.

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