The analysis of variances is a very important part of identifying financial statement change. Variances can usually be identified in terms of components, or individual parts, that make up a whole. They could be measured when comparing two points-in-time or as a single point in time against a goal, or plan.

Depending on what you're measuring, there can be an infinite number of variance components that make up the total variance explanation. Most of the time you can apply the 80/20 rule to your explanation - that is 80% of the variance can usually be explained by several major components and the remaining 20% being explained by the remainder. I've found that in most cases if you can explain 80% - 90% of the variance that's usually adequate for management.

In the example, how do you explain the increase in revenue versus plan given the change in volume? In this example the change in volume and rate make up two components, or 100%, of the variance. These components are calculated in section "A" of the template below.

What is interesting about the calculation is that the percent changes on the volume and rate components are not additive. Section "C" provides that proof as well as how those percentage tie out to the total (see the green shaded cells).