How to Calculate Budget vs Actual Variance Percentage

Budget versus actual variance is the difference between a planned financial amount and the real outcome over a specific period. This analysis measures financial performance against established plans, helping individuals and organizations understand how well they managed resources or achieved financial goals. It indicates deviations from expectations, whether positive or negative, and is fundamental for effective financial oversight and decision-making.

Core Components of Variance Analysis

Variance analysis relies on two primary financial figures: budgeted and actual amounts. Budgeted figures represent planned financial values for a period, such as anticipated revenue or expected expenses. These amounts are established before an activity or period begins, serving as a financial roadmap. Actual figures are the real financial outcomes that occurred during the same period. These values reflect money truly earned or spent, verifiable through financial records like bank statements or invoices.

Calculating the Variance Percentage

The budget versus actual variance percentage is calculated using the formula: ((Actual - Budget) / Budget) 100%. This formula quantifies the deviation as a proportion of the original plan, providing a standardized way to compare performance across different financial categories or periods. For example, if a business budgeted $5,000 for supplies but spent $5,500, the difference is $500. Dividing this by the budget ($500 / $5,000 = 0.10) and multiplying by 100% yields a 10% positive variance. Conversely, if projected revenue was $10,000 but actual revenue was $9,000, the calculation is ($9,000 – $10,000) / $10,000 = -0.10, resulting in a -10% variance. Accurate results depend on correctly identifying and placing the actual and budgeted figures in the formula.

Interpreting Your Results

The calculated variance percentage provides insight into financial performance. A positive variance percentage means the actual figure was higher than the budgeted figure. For expenses, this is unfavorable, indicating overspending that could impact profitability or cash flow. For revenue, a positive variance is favorable, showing more income was generated than projected.

Conversely, a negative variance percentage indicates that the actual figure was lower than the budgeted figure. For expenses, this is favorable, signifying underspending and efficient resource management. For revenue, a negative variance is unfavorable, meaning less income was earned than planned. This information helps identify areas for improvement, such as adjusting spending or revising revenue strategies.