Percent variance definition
/What is Percent Variance?
A percent variance presents the proportional change in an account balance from one reporting period to the next. It is used to decide which changes are sufficiently large to trigger an investigation. Thus, it shows the change in an account over a period of time as a percentage of the account balance. The percent variance formula is:
(Current period amount – Prior period amount) ÷ Prior period amount = Percent variance
Example of Percent Variance
For example, the sales for the northeast sales region of a company were $1,000,000 in the first quarter of the prior year, and are $900,000 in the first quarter of the current year. The calculation of the percent variance is:
($900,000 Current period sales - $1,000,000 Prior period sales) ÷ $1,000,000 Prior period sales
= -10% variance
This 10% decline in sales will likely draw the attention of management for further investigation.
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Variations on the Percent Variance
A variation on the concept is to compare the current period amount to the budgeted amount for the same period. In this case, the formula changes to:
(Budgeted amount – Actual amount) ÷ Actual amount
= Percent variance
For example, a company had budgeted $160,000 of utilities expense during its fourth quarter, and incurred $180,000 of utilities expense in that time period. The percent variance calculation is:
($160,000 Budgeted expense - $180,000 Actual expense) ÷ $180,000 Actual expense
= -11.1% variance
This is an unfavorable variance, for which management may seek a more detailed explanation.
How to Use the Percent Variance
The percent variance is used by management to evaluate which changes during a reporting period require investigation. Large percent variances are more likely to draw their attention. Investment analysts also like to use percent variances, since they can indicate increasing or declining trends in sales and profits that can translate into changing stock prices. Auditors also use percent variance calculations to decide which account balances require further investigation.