Variances Variances between actual and budgeted amounts can be analyzed down to the same level of detail that was used to prepare the budget. This analysis is what justifies the effort to develop the budget at the detailed level rather than solely in broad numbers. Many growing or stable organizations have continued to operate for years with one or more very inefficient functions simply because the costs were always comparable with the previous year. The fact that the cost was always high escaped notice because there was no detail to use for comparison. Variance analyses should be prepared monthly for the key components of the income statement.
Sales is always a key component as is cost of sales.
Usually, the top three or four items in the operating expenses are analyzed individually and the rest are aggregated unless the variance is unacceptably large. These key variances should be computed each month. Management should identify the major causes of each variance. Typically, variances are analyzed in terms of volume, price, and mix. Other methods of differentiating variances can be used if meaningful.