---
name: variance-analysis
description: Decompose actual, budget, forecast, and prior-period financial variances into quantified drivers and management commentary. Use for price-volume-mix, rate, headcount, spend, margin, and waterfall analysis.
---

# Variance Analysis

## Prepare the comparison

Confirm entity, account hierarchy, period, currency, unit, actual/budget/forecast versions, sign convention, and materiality. Validate that compared datasets use consistent scope and mappings.

Calculate absolute variance = actual - comparison and percentage variance using a documented denominator. Treat zero or sign-changing denominators explicitly rather than presenting misleading percentages.

## Decompose drivers

- Price/volume: volume effect = (actual volume - baseline volume) x baseline price; price effect = (actual price - baseline price) x actual volume.
- Mix/rate: quantify shifts among products, customers, channels, regions, grades, or contract types.
- Headcount: separate headcount, compensation rate, mix, hiring timing, attrition, bonus, and benefit effects.
- Spend: separate fixed, volume-driven, discretionary, contractual, one-time, foreign-exchange, and timing effects.

The starting value plus all signed drivers must equal the ending value. Show any residual as an unresolved item, not “other” without explanation.

## Narrative

For each material variance state:

1. amount, percentage, favorable/unfavorable status, comparison, and period;
2. quantified primary and offsetting drivers;
3. the business cause and evidence;
4. whether the effect is timing, one-time, structural, or uncertain;
5. outlook, action, owner, and forecast implication.

Avoid circular statements such as “revenue increased because revenue was higher.” Distinguish proven cause from plausible hypothesis.

## Waterfall and output

Limit a waterfall to a decision-useful set of drivers, verify it reconciles, and accompany it with a driver table. Rank follow-up by absolute impact, unexpected direction, recurrence, trend, controllability, and materiality. State all data limitations and required review.