Budget vs Actual Variance Report Example

The budget vs actual variance percentage formula is the most important calculation in any variance report. It answers the question: "How far off are we from plan, as a proportion of what we planned?" This normalised view is essential because a £10,000 variance means very different things depending on whether the budget was £50,000 or £5,000,000.

The formula is straightforward:

Variance % = (Actual - Budget) / Budget x 100

For example, if your budgeted revenue was £1,020,000 and your actual revenue was £1,065,000:

Variance % = (£1,065,000 - £1,020,000) / £1,020,000 x 100 = +4.4%

The positive sign indicates a favourable variance -- you earned more than planned. For cost lines, a positive result means you spent less than planned, which is also favourable.

Some finance teams use the absolute value of the budget in the denominator (i.e., ABS(Budget)) to avoid sign confusion when budgeted costs are expressed as negative numbers. This is particularly important in P&L formats where costs appear in brackets.

Below is a worked example showing how to calculate variance for each line of a simplified P&L. All figures are in GBP and represent a single quarter for a mid-sized UK business.

Revenue: Budget £850,000 | Actual £892,500 | Variance £+42,500 | Variance % +5.0% (Favourable) The business exceeded its revenue target by 5%, driven by a large project win in the second month of the quarter.

COGS: Budget £340,000 | Actual £364,000 | Variance -£24,000 | Variance % -7.1% (Adverse) Cost of goods sold overran by 7.1%. The additional revenue came with higher-than-expected direct costs, suggesting margin dilution.

Gross Profit: Budget £510,000 | Actual £528,500 | Variance +£18,500 | Variance % +3.6% (Favourable) Gross profit is favourable in absolute terms, but gross margin fell from 60.0% to 59.2% -- a 0.8 percentage point decline worth investigating.

Operating Expenses: Budget £380,000 | Actual £401,000 | Variance -£21,000 | Variance % -5.5% (Adverse) OpEx overran by 5.5%, primarily driven by unbudgeted recruitment fees and a software licence renewal that was not in the original plan.

Net Profit: Budget £130,000 | Actual £127,500 | Variance -£2,500 | Variance % -1.9% (Adverse) Despite higher revenue, net profit is slightly below budget. The revenue uplift was more than offset by cost overruns, illustrating why revenue variance alone is an incomplete measure of performance.

Understanding the difference between favourable and adverse variances is fundamental to reading any budget vs actual report correctly.

A favourable variance means the actual result is better than budget. For revenue and profit lines, this means the actual figure is higher than budget. For cost lines, a favourable variance means the actual figure is lower than budget -- you spent less than planned.

An adverse variance (sometimes called "unfavourable") means the actual result is worse than budget. For revenue, this means you earned less than planned. For costs, it means you spent more.

The sign convention used throughout this report follows the standard favourable-positive approach: - Revenue: Actual > Budget = positive (favourable) - Costs: Actual < Budget = positive (favourable) - Costs: Actual > Budget = negative (adverse)

This convention is used by the Chartered Institute of Management Accountants (CIMA) and is standard practice in UK finance teams. It is more intuitive than simply reporting positive/negative differences, because a "positive" number on a cost line could be confusing without context.

Some organisations use colour coding alongside the sign convention: green for favourable, red for adverse, and amber for variances that are close to the materiality threshold. This visual layer makes it easier for non-finance stakeholders to scan the report quickly.

Creating an effective variance report involves more than just calculating the differences between budget and actual. Follow these steps to produce a report that drives action.

Not every variance deserves investigation. If you chase every small deviation from budget, your finance team will spend all their time explaining noise rather than driving action. Materiality thresholds help you focus on what matters.

Common materiality thresholds used by UK finance teams: - Small businesses (under £5M revenue): >5% or >£5,000 - Mid-market businesses (£5M-£50M revenue): >5% or >£10,000 - Large businesses (over £50M revenue): >3% or >£25,000

The dual threshold approach (percentage AND absolute) is important. A 20% variance on a £2,000 line item (£400) is probably not worth investigating. But a 2% variance on a £2,000,000 line item (£40,000) almost certainly is. The percentage threshold catches proportionally large deviations on small lines; the absolute threshold catches significant pound amounts even on large lines.

Some organisations also apply tiered thresholds: a lower threshold for operating expenses (where small overruns can compound) and a higher threshold for revenue (where monthly fluctuations are normal). The key is to agree the thresholds with your leadership team before the financial year starts, document them in your reporting policy, and apply them consistently.

Even experienced finance teams make these mistakes when producing variance reports. Avoiding them will improve the quality and credibility of your BvA reporting.