Variance analysis compares actual costs or sales to estimated or budgeted amounts to analyze differences. It is used to explain variances between estimated and planned costs/sales, and between planned and actual costs/sales. Understanding the causes of variances helps identify areas for improvement to better estimate future costs/sales and make plans. Regular variance analysis provides important information for monitoring project and organizational performance.

1. Need For Variance Analysis
By:
T. Madhavi Rao
Vikash Rathour
Utkarsh Singh Baghel
Rahul Kumar

2. What is variance analysis?
 Variance analysis is usually associated with explaining the difference
(or variance) between actual costs and the standard costs allowed for
the good output.
 For example:- If you expected something to cost Re.1 and it, in
fact, cost Rs.1.25, then you have a variance of Re.0.25 more than
expected. This, of course, means that you spent Re.0.25 more
than what you planned.
 Variance analysis is also used to explain the difference between the
actual sales and the budgeted sales. Examples include sales price
variance, sales quantity (or volume) variance, and sales mix variance.
A difference in the relative proportion of sales can account for some of
the difference in a company’s profits.

3. Types of Variances
Estimate Planned
to Estimate
to
to Actual
Planned Actual

4. Estimate to Planned
This is the difference between what we quoted and how we
actually planned to do the work. We look at what has
changed and why. It may be that there are new
processes, vendors, materials, technology, laws, etc. If the
variances are significant, We search for alternatives before
work commences whenever possible. If alternatives are not
possible, then we learn from the situation and communicate
what not to do for subsequent work. You may wonder why
there is a difference between planned and estimated. This is
due to situations where projects are quoted without formal
detailed planning often by a group who will not actually do the
work. As you can imagine, it is advantageous to keep the
quoting and planning teams in synch over time.

5. Planned to Actual
This variance looks at the difference between how work
is planned and how it actually is executed. By comparing
planned to actual, we can see how the work changed
once in progress. There may be changes brought on by
the project team, by the customer, by vendors or by a
change in the environment, such as new regulations.
Regardless, the changes need to be analyzed so issues
can be identified and mitigation strategies can be
developed to protect future work.

6. Estimate to Actual
Here, we compare what we quoted to what we actually
did. This is a crucial comparison. If jobs are estimated in
a manner that operations cannot support, then there are
substantial risks including profit losses and even project
failures. Again, by analyzing the numbers, we can
determine what changed, why and then take corrective
action. For subsequent work, we may need to change
vendors, processes, materials, contractual
stipulations, etc.

7. Why do we do this?
 In short, we want to do variance analysis in order to learn.
One of the easiest and most objective ways to see that things
need to change is to watch the financials and ask questions.
You cannot and should not base important decisions solely on
financial data.
 You must use the data as a basis to understand areas for
further analysis. Use the numbers to highlight areas to
investigate, but do not make decisions without first
investigating further.

8. Conclusion
By using variance analysis to identify areas of
concern, management has another tool to monitor project
and organizational health. People reviewing the variances
should focus on the important exceptions so management
can become aware of changes in the organization, the
environment and so on. Without this
information, management risks blindly proceeding down a
path that cannot be judged as good or bad.

9. Thank You