What Is Variance?
Variance in accounting is the difference between an expected or budgeted amount and the actual result. It's used to measure and explain performance — showing where a business came in over or under plan.
What variance is and why it matters
Variance analysis is how businesses turn a budget from a static plan into a management tool. By comparing actual results to budget line by line, it isolates where and by how much performance diverged, then prompts the question "why?" A variance is called favorable when it helps profit (revenue above plan, costs below plan) and unfavorable when it hurts (revenue below plan, costs above plan). Breaking variances into their drivers — for example, splitting a cost variance into price and volume components — points to the specific cause and the right response. Regular variance review is central to financial control and to advisory reporting.
A worked example
A company budgeted $250,000 in revenue and $180,000 in expenses for the quarter, expecting $70,000 profit. Actuals came in at $240,000 revenue and $165,000 expenses, for $75,000 profit. The revenue variance is $240,000 − $250,000 = −$10,000 (unfavorable), while the expense variance is $165,000 − $180,000 = −$15,000, which is favorable because spending was below plan. Net, profit beat budget by $5,000 — but the analysis shows it happened through cost control, not sales, which management should investigate.
How firms handle it today
Firms run budget-versus-actual reports at close, quantify each variance, and explain the drivers to clients — flagging which gaps are timing, which are structural, and which need action.
Related terms
- Budget
- Forecasting
- KPI
- Revenue
- Operating expenses
FAQ
What's the difference between a favorable and unfavorable variance?
A favorable variance helps profit (higher revenue or lower costs than planned); an unfavorable one hurts it.
What is variance analysis?
Comparing actual results to the budget, quantifying the differences, and explaining what caused them.
Why does variance matter?
It shows where performance diverged from plan and points management to the causes, enabling corrective action.