Explaining Budget vs. Actual Variances in Financial Reports

​Most governments prepare monthly or quarterly budget vs. actual financial reports so that management and elected officials can monitor progress of revenues and expenses vs. the adopted budget. Each government prepares these budget vs. actual financial reports in slightly different formats and various levels of detail depending on their needs. Attached is an example of a good budget vs. actual financial report (click the link to view and download the Excel spreadsheet: "Sample - Budget vs. Actual Financial Report").
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For most readers of the report, it is very important to provide narrative to help them understand the most important points. Therefore all significant budget vs. actual variances should be explained in simple language. To prepare these variance explanations, accounting personnel will need to decide:

• What variances are large enough to be worthy of explanation?
• How much detail should be provided in the explanation?
• Should explanations be provided for current month/quarter variances or year-to-date variances?

Below Are 6 Good Rules of Thumb for Providing Variance Explanations:

1. Year-to-date variances matter more than current month/quarter variances. Elected officials and members of management should not be expected to remember variances from prior months/quarters. Therefore it is best for variance analysis to be on year-to-date amounts. After all, if a monthly/quarterly variance does not lead to a year-to-date variance, it was probably just a timing difference that caused it.
2. To do effective budget vs. actual explanations, you will need good detail of what makes up the budget amount. If the current budget amount is simply last year’s budget amount plus 2% inflation, you will find it difficult to decide whether a particular expense was budgeted or not, and therefore whether it is contributing to a variance or not.
3. Choose a dollar amount considered significant and explain all line items with variances greater than this amount. When you are explaining year-to-date variances, this dollar cut-off will grow each month/quarter.
4. Explain the largest variances in good detail. It is better to spend time thoroughly explaining a small number of large variances than explaining a large number of variances with little detail.
5. Quantify, quantify, quantify. When I see an unquantified explanation, I ask to see the underlying documentation; too often I find that the explanation explains only 1% (or other times explains 200%) of the variance amount.
6. For most variances, accounting personnel won’t know the causes well enough to write a good narrative explanation. Therefore you will often need to contact operating personnel to understand the variances. This is a time consuming part of preparation of the budget vs. actual financial report and is another reason to limit the number of explanations to just the largest few.

Here are a few examples of good variance explanations:

• Timing difference. Q2 grant disbursements of $5.8 million were budgeted in June, but paid in July. Variance resolved in July.
• Tenants pre-paid rent at September 30 totaling $108 thousand.
• Police expenses were under budget by $165 thousand. $147 thousand of this difference is due to 3 officer positions budgeted for the year but not yet filled.

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Frequently several small variances make up a large variance.
Here is an example of a good explanation in such circumstance:
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• Consultants expense is over budget by $28,000, which is primarily composed of the following:
  • Creek rehabilitation study, not budgeted                                          $50,000
  • Brownfield feasibility study delayed until next year                         (40,000)
  • Annual audit fees overrun for GASB 87 implementation                    10,000

If there are variances going in the opposite direction (such as Brownfield feasibility study above), include and explain. Keep adding the next largest dollar variance until you have explained about 80% of the line item variance.
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The same discipline described above for explaining budget vs. actual variances can be used whenever financial variances need to be explained.

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​For more specific questions regarding budget variances or your financial reports, please feel free to reach out to Kevin directly – he is available for a free consultation, via phone or email:

Kevin Harper, CPA 
kharper@kevinharpercpa.com 
(510) 593-503

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