Variance analysis
Variance analysis compares actual results with budgeted figures and decomposes any gap into named, explainable causes.
What it is
See it move
A two-branch tree shows that total variance splits into two components: the flexible-budget variance (capturing price and efficiency differences) and the sales-volume variance (capturing only the effect of selling more or fewer units than planned). Together the two branches sum to the total static-budget variance. This decomposition allows managers to distinguish operational performance from pure volume effects, so that each type of deviation can be investigated separately.
The formula
Top-level decomposition: splits the total gap between actual results and the original budget into a volume effect and a price/efficiency effect.
Variables
- Actual units sold (units)
- Budgeted units sold (units)
- Budgeted contribution margin per unit (€ per unit)
Isolates the profit effect of selling a different volume than planned, holding the budgeted margin constant.
Covers all differences not explained by volume: paying more or less per unit of input (price variance) and using more or fewer inputs than the standard allows (efficiency variance).