How to Prepare & Format Variance Reports

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  • 0:02 What Is a Variance Report?
  • 0:44 Formatting a Variance Report
  • 1:50 Why Bother?
  • 2:29 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

Finding the variance between a real cost and a standard cost is only helpful if you pass that information on to those who can use it. In this lesson, we learn how to prepare and format variance reports, then look at who uses the information.

What Is a Variance Report?

No matter how accurate your estimates are, chances are that you're going to get some things wrong. This is especially true when planning based off of standard costs, the costs that a company uses to plan budgets for future periods. The difference between the budgeted amount and the real amount is called the variance, and it's a crucial number for accountants and managers to keep track of.

So how do they get it? Simple - people write variance reports that detail the variances during a given period. In this lesson, we're going to learn how to format a variance report and discover why it is a crucial part of the accounting process and how it's used to make a number of important business decisions.

Formatting a Variance Report

While companies differ with respect to how they prefer variance reports to appear, all variance reports must always have four pieces of information per variance listed.

  • First, they must have the name of the variance. For variances in income, this is a source of income. For variances in expenses, this is the category of expense.

  • Next, they must have the budgeted cost. This is what was originally expected when the budget was written and is thus what the business's plans were derived from.

  • Third, it should have the actual amount. This is the real amount that the business spent to get a good or service, or in the case of income, the real amount that the business made.

  • Finally, the amount of the variance must be listed. This is found by subtracting the real amount from the budgeted amount. Be sure to include any negative signs, since these signal that the company lost money on the transaction.

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