Real Estate Accounting Made Easy, 2nd Edition

9VARIANCE ANALYSIS

In Chapter 8 we described the budget as a management tool that helps management set the direction of the business and also aids in the communication of management's strategic goals. A variance analysis is the periodic review of actual business results and the comparison of these to management's approved budget. This analysis shows the degree of discrepancy between budgets and actual results with explanations for the discrepancies. A good variance analysis should be thoroughly detailed to help management and other decision makers understand why actual numbers are different from budgets. A variance analysis can be a powerful management tool because it helps management adjust expectations and also indicates probable issues with the operation of a particular asset or entity. It is good practice to perform variance analysis at least quarterly so that management can be alerted to potential issues in a timely manner.

A well-prepared variance analysis breaks down the numbers such that meaningful budget categories can be compared to the actual results. The level of detail will vary depending on management's needs. Even though it is advisable for the operating team to have a detailed variance analysis, the report presented to top management may only highlight major variances. A well-performed analysis should present side by side the budgeted and actual results for a given period with explanations for significant variances. Management normally sets a variance threshold(s) ...