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Variance: Definition and Meaning
Definition
A variance is the difference between an actual result and a planned, budgeted, estimated, or prior-period result.
Why It Matters
Variance analysis helps management identify changes and investigate their causes. A variance may be favorable or unfavorable depending on the measure involved. The goal is not simply to explain the difference; it is to decide whether action is needed.
For contractors, useful comparisons may include actual job costs versus estimates, gross profit versus forecast, labor hours versus budget, billings versus plan, and current cost-to-complete versus original estimates.
Example
Actual labor cost is $15,000 higher than the budgeted amount. The difference is an unfavorable labor-cost variance.
Related Terms
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