Actual vs Budget
Computing variance and percent variance against the plan
A budget is a promise; the variance is how far reality landed from it. Two numbers - the dollars and the percent - tell the whole story.
Two numbers that measure the gap
The variance is how far the actual result landed from the budget: $Variance = Actual - Budget$. To make that gap comparable across line items of very different sizes, percent variance scales it by the budget: $\%Var = \frac{Actual - Budget}{Budget}$. The sign says whether actual beat the plan (positive) or missed it (negative); the percent says how big the gap is relative to what was planned.
Reading the formula
$Actual - Budget$ is the dollar gap, positive when actual exceeds the plan and negative when it falls short. Dividing by $Budget$ turns that dollar gap into a percent, so a $80,000 variance on a $1,000,000 budget (8%) can be compared with a $8,000 variance on a $100,000 budget (also 8%). Always divide by the budget - the plan you are measuring against - never by the actual.
Percent variance always divides by the Budget, because the budget is the plan you are measuring against. Dividing by Actual would shrink the gap as performance improves and hide misses; dividing by Budget keeps the comparison honest across periods and line items.
- 1. Variance = Actual - Budget = 1,080,000 - 1,000,000 = $80,000.
- 2. %Var = Variance / Budget = 80,000 / 1,000,000 = 0.08 = 8%.
💡 Hint
Check your understanding
- Variance = Actual - Budget; percent variance = Variance / Budget.
- A positive variance means actual exceeded the plan; read the sign first.
- Percent variance sizes the gap relative to the budget, so it is comparable across line items.