Guide
Budget vs actual variance analysis: calculate it, then explain it
Variance analysis compares what actually happened with what the budget said would happen, line by line, and explains the differences that matter. For each line, variance = actual − budget; a variance is favourable when it improves profit and unfavourable when it reduces it. Below: the calculation, how to decide which variances deserve a comment, how to write that comment, and a worked example from a sample company's books.
Updated
The calculation
variance = actual - budget variance % = (actual - budget) / budget x 100
Do it for every line of the profit and loss: revenue, cost of revenue, gross profit, each group of operating expenses, and the operating result. Use the same columns every month (budget, actual, variance, variance %) so a reader learns the layout once. When the budget itself is negative, such as a planned loss, divide by its size without the sign, so a better-than-planned result still shows as a positive percentage.
Calculated the same way every month, this is the budget vs actual comparison; the analysis is what you do with it next.
Favourable and unfavourable
The sign of a variance does not tell you whether it is good news, because it means opposite things on income and cost lines. Label every variance by its effect on profit instead:
| Line | Actual above budget | Actual below budget |
|---|---|---|
| Revenue, gross profit, operating result | Favourable | Unfavourable |
| Cost of revenue, operating expenses | Unfavourable | Favourable |
- A favourable cost variance is not always a saving. Spending below budget often means something was delayed, such as a hire that has not started or a campaign that moved to next month.
- An unfavourable cost variance is not always overspending. If revenue is also above budget, costs that grow with sales should be above budget too. Check the margin before calling it a problem.
How do you set a materiality threshold for variances?
Set it before you look at the numbers, and keep it the same every month. Use two tests together, a percentage of budget and an amount: a percentage alone flags tiny lines, and an amount alone flags large lines close to plan. There is no standard figure; the right levels depend on the business and its readers.
Not every variance deserves a paragraph. Before you look at the numbers, set a threshold that a variance must cross to be explained, and keep it the same every month so the choice of what to comment on is not made after the fact.
Use two tests together: a percentage of budget and an amount. A percentage alone flags tiny lines, such as a large swing on a small subscription, and an amount alone flags large lines that are close to plan. Requiring both keeps the commentary on what moves the result. The right levels depend on the size of the business and who reads the report; there is no standard figure.
Lines below the threshold are still in the table. They are just not worth a sentence this month, unless several small variances point the same way.
Worked example: Northbridge Analytics, September 2026
Northbridge Analytics is the sample company in Ataski's Financial Analyst workspace. These figures are the actual-against-plan comparison in its sample monthly management report, built from one set of generated books.
| Line | Budget | Actual | Variance | Variance % | Comment? |
|---|---|---|---|---|---|
| Revenue | $145,140 | $163,156 | +$18,015 favourable | +12.4% | Yes |
| Cost of revenue | $42,678 | $44,002 | +$1,324 unfavourable | +3.1% | No |
| Gross profit | $102,463 | $119,154 | +$16,691 favourable | +16.3% | Total |
| Operating expenses | $169,871 | $181,300 | +$11,429 unfavourable | +6.7% | Yes |
| Operating result | −$67,408 | −$62,146 | +$5,262 favourable | +7.8% | Total |
Take an example threshold, chosen for illustration only: explain a line when its variance is at least 5% of budget and at least $5,000. Here that means commenting on revenue and operating expenses, while cost of revenue stayed below it. The totals follow from the lines above them: the operating result came in +$5,262 against plan, favourable.
Commentary from the sample report
“Revenue of $163,156 in September 2026 came in above the budget of $145,140 — up from $144,547 the month before. Behind it: Implementation Services $9,000 (none the month before) and Subscriptions - Enterprise $77,650 (from $72,250). Implementation Services had nothing the month before, so part of this difference does not repeat next month.”
The line, its value against the budget and the prior month, and the accounts behind the movement, each with an amount: everything a reader needs to decide whether to ask a follow-up question.
How to write the commentary
- Start with the result. One sentence on the operating result against budget, and the one or two lines that explain most of the difference.
- One short paragraph per line above the threshold. The amount, the direction, and the accounts that caused it, each with its own amount.
- Say what kind of variance it is. Timing, one-off or permanent (see below), because each one means something different for next month.
- Say what happens next. A forecast to update, an action with an owner and a date, or nothing, stated plainly.
- Weak: "Marketing was over budget this month."
- Strong: "Marketing was over budget because the spring trade show was paid this month instead of next. It is a timing difference: the full-year marketing budget is unchanged."
How do you explain a P&L variance to the CEO?
Lead with the profit impact: how far the operating result landed from budget, and which way. Then give at most three drivers, each with its amount and whether it is timing, one-off or permanent. Say what changes in the forecast, and end with one action that has a named owner.
For each driver, name the accounts behind it and say which kind it is: timing reverses in a later month, a one-off will not repeat, a permanent change moves the months ahead. Everything outside the top three stays in the table.
Example · illustrative figures, not a real company
Before: “Revenue was down and costs were up, so profit missed budget.”
After: “Operating profit came in $42,000 below budget: $30,000 is a renewal that slipped to next month (timing) and $12,000 is a legal fee (one-off), so next month's forecast rises by $30,000 and nothing else moves; the head of sales confirms the new signing date by Friday.”
Is a variance timing, one-off or permanent?
Timing means the money moved in a different month than the budget expected, and it reverses later. One-off means it happened and will not repeat, so keep it out of any trend. Permanent means something changed for good, such as a price rise or a lost customer: update the forecast, and consider re-budgeting.
- Timing. The money moved in a different month than the budget expected: an annual invoice paid early, a delayed hire. It reverses later; say when.
- One-off. It happened and will not repeat: a legal fee, a write-off, a one-time project. Keep it out of any trend you extrapolate.
- Permanent. Something changed for good: a price rise, a lost customer, a new team member. Update the forecast, and consider re-budgeting if the change is large.
Doing it in your accounting system
In Xero, the Budget Variance report does the calculation for you: see budget vs actual in Xero. In QuickBooks Online, see a monthly management report from QuickBooks Online. The commentary then goes into the monthly management report, next to the numbers it explains.
Or have it written for you
Ataski's Financial Analyst writes the monthly management report from your accounting system, with each line that moved explained by the accounts that moved it, and by how much.
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Questions
How do you calculate a budget variance?
Variance = actual - budget, for each line of the profit and loss. As a percentage: (actual - budget) / budget x 100. When the budget is negative, such as a planned loss, divide by its size without the sign.
What is the difference between a favourable and an unfavourable variance?
A favourable variance improves profit: revenue above budget, or a cost below it. An unfavourable variance reduces profit: revenue below budget, or a cost above it. The plus or minus sign alone does not tell you which, because it means opposite things on income and cost lines.
Which variances should I explain?
Those above a materiality threshold you set in advance, usually a percentage of budget and an amount that must both be crossed. There is no standard level; choose one that suits the size of the business and keep it the same every month.
What should variance commentary say?
The amount, the direction, the accounts that caused it with their own amounts, whether it is a timing difference, a one-off or permanent, and what happens next: a forecast update, an action with an owner, or nothing.