What Is a Budget Variance? Variance Analysis Explained

How to calculate a budget variance

You need two numbers for each line of the budget: what you planned and what happened.

Variance in dollars = actual - budget. Variance as a percentage = (actual - budget) / budget x 100. In the landscaping example, $1,380 - $1,200 = $180, and $180 / $1,200 = 0.15, or 15%.

Reports don't all use the same sign. Some subtract actual from budget, so an overspend shows as a negative number, and some software does the opposite. Don't rely on the plus or minus. Label each variance favorable (F) or unfavorable (U) instead, as the Association for Financial Professionals does, because a higher number is good news on a revenue line and bad news on a cost line.

Look at dollars and percentages together. A $300 overrun on a $1,000 line is 30% and worth a question. A $2,000 overrun on a $400,000 payroll line is 0.5% and probably noise.

Variance analysis only works if the budget is broken down the way you actually spend: by job, property or account. If you're starting from scratch, our guide to building a small-business budget walks through it.

Favorable and unfavorable variances

For costs, spending less than budget is favorable and spending more is unfavorable. For income it flips: earning more than budget is favorable, earning less is unfavorable.

Favorable doesn't always mean good. A maintenance line that's $4,000 under budget in June might mean you got a better price. It might also mean repairs were put off and will cost more in August. Or a vendor bill simply hasn't arrived yet, which is a timing difference that reverses next month. The OpenStax managerial accounting text notes that asking managers to explain favorable variances too shows whether they're likely to last.

The reverse holds as well. An unfavorable variance on a job that's ahead of schedule may just be spending that arrived early.

Price and quantity: why a cost misses its budget

Most costs are a quantity times a price: yards of concrete times the price per yard, crew hours times the hourly rate. So when a cost misses its budget, you paid a different price, used a different amount, or both.

Accountants split the variance the same way. The materials price and quantity variances work like this:

• Price variance = (actual price - budgeted price) x actual quantity used
• Quantity variance = (actual quantity - budgeted quantity for the work done) x budgeted price

For labor, the same split is called the rate variance (what you paid per hour) and the time or efficiency variance (how many hours it took).

The split tells you who can fix the problem. A price variance usually points to purchasing or a supplier. A quantity variance usually starts in the field or in the estimate: waste, rework, theft, or a takeoff (the material count in the estimate) that was short from the start.

Revenue splits the same way, into price and volume. Rent income can miss its budget because rents were lower or because fewer units were leased.

Worked example: a garage job for a small contractor

A small general contractor builds a detached two-car garage for a $52,000 contract price. It budgeted $44,000 in costs, for a planned gross profit (price minus job costs) of $8,000, about 15.4% of the price. Contractors track this per job through job costing, which assigns every cost to the job that caused it. Here's the job cost report at completion:

A 4% overrun sounds minor. But every dollar of it came out of profit. The job made $6,240 instead of $8,000, a 22% drop, and the margin fell from 15.4% to 12.0%.

Concrete is the biggest percentage miss, so start there. The budget was 40 cubic yards at $150 a yard. The job used 44 yards at $165. The price variance is ($165 - $150) x 44 = $660 unfavorable. The quantity variance is (44 - 40) x $150 = $600 unfavorable. Together that's $1,260, which matches the table.

About half the miss is a supplier price that rose after the bid, and the estimating price list needs updating. The other half is four extra yards, so someone should check whether the excavation ran deep or the takeoff was short.

Labor was budgeted at 400 hours at $55 an hour and took 420 hours at the same rate. The rate variance is zero. The efficiency variance is (420 - 400) x $55 = $1,100, all from 20 extra hours. The crew lead's daily logs should show where they went: a rain delay, rework or a slow inspection.

Lumber came in $600 under. Before calling that good news, check that every lumber yard invoice has been entered. A bill sitting in a truck makes a job look cheaper than it was.

Static vs flexible budgets

A static budget is set once, for one expected level of activity. A flexible budget recalculates the budget for the activity that actually happened. The difference matters for variable costs, the ones that rise and fall with volume.

Take a property manager who budgets turnover cleaning, the clean between one tenant and the next, for 6 move-outs a month at $250 each, or $1,500. In a busy month there are 9 move-outs and cleaning costs $2,160. Against the static budget, that's $660 over, or 44%.

Flex the budget to 9 move-outs and it becomes 9 x $250 = $2,250. Actual spending of $2,160 is $90 under that: $240 per clean instead of $250. The $660 has two parts: $750 unfavorable from volume, which is just more move-outs, and $90 favorable from price. Nobody overspent. The building had a busy month.

How to run variance analysis each month

1. Pull budget vs actual for the month by job, property or general ledger account (the categories your books are organized into), not just company totals.
2. Calculate the dollar and percentage variance for each line and mark it F or U.
3. Pick out the lines that cross your threshold.
4. For each one, find the cause, whether price, quantity, timing or a coding error.
5. Decide whether to fix the process, update the estimate or forecast, or accept the variance.
6. Write one line of explanation next to each variance, so next month's review starts with context.

Rule out coding errors first. If a $900 plumbing charge for one job is coded to another, you get two variances that aren't real: one job looks $900 over and the other $900 under.

When a variance won't reverse, such as a supplier's new price list, update the forecast instead of explaining the same gap every month. A rolling forecast is one way to keep the numbers current. If one job's costs keep climbing past its budget, you're looking at a cost overrun, and the earlier you see it, the more options you have.

Catching variances before month-end

A monthly report shows variances after the money is gone. On an active job, a weekly look is often the difference between a fix and a write-off.

In Clyr, each card swipe, bill and reimbursement lands on the job and cost code (the type of work, like concrete or framing) while the crew is still on site, so budget versus actual stays current during the month. Its spend insights flag budget trends, meaning categories drifting toward their limits, and spend spikes measured against your own trailing weekly average. Findings arrive in a weekly digest, and each one links to the transactions behind it.

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