Variance analysis

Budget versus actual

Calculate variances with a consistent sign convention, label them favourable or adverse, and explain what drove them.

20 minintermediateFree lesson

Learning objectives

Calculate line-by-line variances with a consistent sign convention
Label variances favourable or adverse for revenue and cost lines
Explain a profit variance as the sum of its line variances

Every month, FP&A compares actual results with the budget and explains the differences: the variances. Management uses this to spot problems early (sales falling short, costs running ahead) and to decide what to do. A variance report that gets the signs wrong, or that lists numbers without saying why they moved, is worse than useless.

Rawdah has closed the first quarter of FY2026. The revenue budget comes from the phased budget you built (January–March), rounded to SAR 0.1m. Rawdah Home Retail Co. is a fictional retailer; all figures are illustrative.

Variances, favourable positive

Revenue or profit variance = Actual − Budget; Cost variance = Budget − Actual; Variance % = Variance ÷ Budget

F (favourable): the result is better for profit than budgeted: more revenue, or less cost
A (adverse): worse for profit than budgeted: less revenue, or more cost
Variance %: the variance as a share of the budget, to judge size

Rawdah Q1 FY2026: what explains the EBITDA variance (SAR m, favourable +)

Data

	Variance
Revenue	-12
COGS	4.2
Staff	-0.9
Occupancy	0
Marketing	-1.4
Other	0.9
EBITDA	-9.4

From numbers to commentary, step by step:

Calculate every line with the same convention and check that the line variances add up to the profit variance. If they don't, a sign is wrong somewhere.
Add the variance %, then decide what is material. Many teams set a threshold (for example, a percentage of budget or a fixed riyal amount) and explain only the lines above it, so management reads about the few things that matter rather than every rounding difference.
For each material line, write three things: what happened (the number), why (the driver: fewer customers, a lower margin, a campaign brought forward), and so what (is it a one-off or will it continue, and what is being done about it).
Separate timing from permanent variances. Marketing spent in March instead of April is a timing difference that reverses next month; a lower gross margin from heavier discounting is likely to persist and belongs in the forecast.

Rawdah's EBITDA is −9.4 (A) against budget, -13.5% of the budgeted figure. The chart shows that the shortfall is spread across revenue, margin and marketing, so a one-line explanation would hide most of the story.

One variance is still misleading: costs that should move with sales are being compared with a budget built for a different sales level. The next lessons fix that, first by splitting revenue into price, volume and mix, then by flexing the budget to the actual level of activity.

Calculation

Exercise 1

Calculate

Rawdah budgeted SAR 9.0m for Q1 marketing and spent SAR 10.4m. Using the convention favourable = positive, what is the marketing variance (SAR m)?

Your answer

Concept check

Exercise 2

Check your understanding

Rawdah's Q1 cost of goods sold was SAR 4.2m below budget, a favourable variance. Revenue was SAR 12.2m below budget. What should the commentary say about COGS?

Most of the COGS saving comes from selling less, not from buying better. Judge COGS against actual sales: the gross margin fell short of budget.Purchasing did well this quarter: COGS was favourable.The COGS variance offsets the revenue variance, so there is nothing to explain.COGS should be reported as adverse because revenue was adverse.

Worksheet

Exercise 3

Challenge: Rawdah's Q1 variance report

Complete Rawdah's Q1 FY2026 budget-versus-actual report (SAR millions). Favourable is positive: revenue and profit lines = actual − budget; cost lines = budget − actual.

Variances for every line in D2:D9.
The EBITDA variance as a % of budget in E9.
An "F" or "A" label for every line in F2:F9 (use IF on the variance; treat zero as F).

0/17 cells entered · Ctrl+. jumps to the next empty cell

	A	B	C	D	E	F
1	Q1 FY2026, SAR m	Budget	Actual	Variance (F+ / A−)	Variance % of budget	F / A
2	Revenue	388.0	375.8
3	Cost of goods sold	228.9	224.7
4	Gross profit	159.1	151.1
5	Staff costs	38.0	38.9
6	Occupancy (rent, utilities)	30.5	30.5
7	Marketing	9.0	10.4
8	Other operating costs	12.0	11.1
9	EBITDA	69.6	60.2
10
11	Favourable is positive: revenue and profit lines = actual − budget; cost lines = budget − actual.

InputYou build (dashed while empty)Given, lockedVariance (F+ / A−) · Revenue

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