Variance Calculation (+3)

Variance Calculation

For each line item, calculate:

• Dollar variance: Current period - Prior period (or current period - budget)
• Percentage variance: (Current - Prior) / |Prior| x 100
• Basis point change: For margins and ratios, express change in basis points (1 bp = 0.01%)

Materiality Thresholds

Define what constitutes a "material" variance requiring investigation. Common approaches:

• Fixed dollar threshold: Variances exceeding a set dollar amount (e.g., $50K, $100K)
• Percentage threshold: Variances exceeding a set percentage (e.g., 10%, 15%)
• Combined: Either the dollar OR percentage threshold is exceeded
• Scaled: Different thresholds for different line items based on their size and volatility

Example thresholds (adjust for your organization):

Variance Decomposition

Break down total variance into component drivers:

• Volume/quantity effect: Change in volume at prior period rates
• Rate/price effect: Change in rate/price at current period volume
• Mix effect: Shift in composition between items with different rates/margins
• New/discontinued items: Items present in one period but not the other
• One-time/non-recurring items: Items that are not expected to repeat
• Timing effect: Items shifting between periods (not a true change in run rate)
• Currency effect: Impact of FX rate changes on translated results

Investigation and Narrative

For each material variance:

1. Quantify the variance ($ and %)
2. Identify whether favorable or unfavorable
3. Decompose into drivers using the categories above
4. Provide a narrative explanation of the business reason
5. Assess whether the variance is temporary or represents a trend change
6. Note any actions required (further investigation, forecast update, process change)