Variance analysis is a process that businesses use to compare actual results against budgeted or planned amounts. This allows businesses to identify areas where they are over or under budget, and to make adjustments as necessary. Many businesses find variance analysis to be an essential part of their financial planning and accounting process, as it provides valuable insights into where money is being spent.
BASIC P&L COMPARISON
At a glance these two outcomes are very similar and generated the same gross profit margin, but we will see that there is a story behind these two outcomes that we can uncover.
BASIC VARIANCE ANALYSIS
If we subtract Q2 from Q1 we get the variances between the two periods.
Q2 results compared to Q1:
Revenues decreased by 2000
COGS decreased by 2000
Gross profit remains the same
Profit as a percent of revenue increased by 2%
RATE AND VOLUME VARIANCE ANALYSIS
And we can perform a more thorough variance analysis on volume and price per unit and cost per unit. To get the per unit values divide the revenues and COGS by the volume by the units sold. With this analysis we can expand the comparison even further.
Q2 results compared to Q1:
Units sold decreased by 2000
Price increased by $2.19 per unit
Cost increased by $0.83 per unit
RATE AND VOLUME IMPACTS
We can calculate the impact of rate and volume on the variance of both revenue and costs. This analysis helps us understand how rate changes and volume changes affect the business financial results.
Q2 results compared to Q1:
The $2.19 increase in pricing added $15,333 of revenues from last quarter, but
The decrease in volume contributed a decrease in revenues by $17,333
The $0.83 increase in cost per unit added $5,778 in COGS
The decrease in volume contributed a decrease in COGS of $7,778
THE STORY
After finishing the analysis, we could conclude that the company in the example has had an increase in costs from its supplier and in order to cover those costs and maintain its margins, chose to increase pricing. The increase in pricing caused the decrease in the volume of customer purchases as a result.
CONCLUSION
Overall, variance analysis is a valuable tool that can be used by businesses of all sizes to manage finances and track progress towards goals. When used correctly, it can provide insights that would otherwise be difficult to obtain. As a result, variance analysis is an essential part of any financial planning and accounting process. GFT helps companies with their outsourced finance and accounting needs, if you or your company wants to add value to your decision-making process, please contact us www.gfteams.com.
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