financial-statements-variance-calculation

# 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):*

| Line Item Size | Dollar Threshold | Percentage Threshold |
|---------------|-----------------|---------------------|
| > $10M        | $500K           | 5%                  |
| $1M - $10M    | $100K           | 10%                 |
| < $1M         | $50K            | 15%                 |


## 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)