# Budget vs actual > September against the budget the founders wrote in August: favorable and unfavorable by polarity, a flexed cost of revenue, and the three lines that were the budget's own mistakes. Source: https://lopifi.com/learn/budget-vs-actual-variance-analysis Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com) --- **How do I do a budget vs actual variance analysis?** September against the budget the founders wrote in August: favorable and unfavorable by polarity, a flexed cost of revenue, and the three lines that were the budget's own mistakes. In August the founders wrote a [Budget](https://lopifi.com/md/glossary/budget) for September. Now there are actuals. Budget against actual, line by line, is a [Variance](https://lopifi.com/md/glossary/variance) report, and its job is to say which differences matter and why. Each variance is actual less budget, labeled favorable (F) or unfavorable (U) by the line's polarity. Revenue above budget is good news. A cost above budget is the same positive sign and bad news. | Line | Budget | Actual | Variance | F/U | Explain? | | --- | --- | --- | --- | --- | --- | | Revenue | 34,000 | 31,500 | (2,500) | U | | | Cost of revenue | 17,680 | 17,000 | (680) | F | | | Payroll | 8,400 | 8,400 | 0 | | | | Payroll tax | 0 | 642.60 | 642.60 | U | Yes | | Rent | 2,000 | 2,000 | 0 | | | | Insurance | 7,200 | 600 | (6,600) | F | Yes | | Depreciation | 0 | 500 | 500 | U | Yes | | Utilities | 300 | 450 | 150 | U | | | Bad debt | 0 | 160 | 160 | U | | | Net income | (1,580) | 1,747.40 | 3,327.40 | F | | September, budget against actual. Lines that moved by at least $500 and 10% get a written explanation. **Exercise — Label September's variances.** Mark every line that moved favorable or unfavorable. The trap is the sign: a cost above budget is a positive number and bad news. Leave the lines that did not move blank. Type it in the workbook at https://lopifi.com/playground. *[Figure: flux analysis]* The same lines through the review threshold: only those past both the amount and the percentage are flagged. ## Three of these variances are the budget's fault Insurance shows a large favorable variance and depreciation and payroll tax show unfavorable ones, and none of them is about how September went. The budget had the year's insurance as a September cost, $7,200, because that's when it was paid. The books expense a month of it. The budget left out the van's depreciation and the employer's payroll tax entirely. A budget has to be built on the same basis as the books, [accrual](https://lopifi.com/md/glossary/accrual-basis) for accrual, or every month's report is partly a basis difference. **Wrong:** Insurance budget: $7,200 in September, when the check goes out. No line for the employer's tax or the van. **Right:** Insurance budget: $7,200 ÷ 12 a month, as the books will expense it. Payroll tax and depreciation budgeted from day one. Explaining a basis difference every month is noise. Fix the budget once, so the report shows only what the business did. Cost of revenue reads favorable against the budget, and that's the wrong conclusion. [The flexed budget](https://lopifi.com/md/learn/budget-vs-actual-variance-analysis/flexed-budget) shows why. > **A variance is a question, not an answer. Every flagged line gets a sentence saying why, and who's doing what about it.** **Northwind — What goes in the commentary.** 3 lines pass the threshold. Each gets one sentence in the pack: revenue (the walk-in trade was slower than planned), the budget-basis lines (fixed in the October budget), and anything else that moved. "Utilities over by a few hundred dollars" doesn't make the list, and that's the point of a threshold. **Static budget** - Pro: Fixed before the period, so nobody can move the goalposts - Con: Goes stale once volume moves, so variable lines mislead - Best for: Holding the plan to account **Flexed budget** - Pro: Separates volume from efficiency - Con: Needs a clear split of variable and fixed costs - Best for: Judging cost control on variable lines **Latest forecast** - Pro: Reflects what's now known - Con: Moves with every update, so it can't measure the plan - Best for: Cash and hiring decisions mid-year What to compare actuals against. **In this lesson:** the flexed budget, which separates selling less from each sale costing more. ## Pages in this lesson - [The flexed budget](https://lopifi.com/md/learn/budget-vs-actual-variance-analysis/flexed-budget) — 5 min. What is a flexible budget, and why flex the budget for variance analysis? ## Where this lesson's rules come from - [Wikipedia, “Variance (accounting)”](https://en.wikipedia.org/wiki/Variance_(accounting)) — Favorable and unfavorable variances — background (reference) ## Read further - https://lopifi.com/md/journal-entries/prepaid-insurance - https://lopifi.com/md/journal-entries/depreciation - https://lopifi.com/md/journal-entries/payroll - https://lopifi.com/md/calculators/operating-margin - https://lopifi.com/md/calculators/net-margin - https://lopifi.com/md/calculators/contribution-margin - https://lopifi.com/md/differences/accrual-vs-cash-basis - https://lopifi.com/md/differences/gross-margin-vs-net-margin - https://lopifi.com/md/startups/how-to-read-an-income-statement - https://lopifi.com/md/startups/why-close-your-books-monthly - https://lopifi.com/md/accounting/p-and-l - https://lopifi.com/md/accounting/materiality - https://lopifi.com/md/accounting/prepaids - https://lopifi.com/md/docs/catalog/13-metrics-and-analysis - https://lopifi.com/md/docs/domain/02-periods-and-close - **Track:** [Finance](https://lopifi.com/md/learn/finance) - **Lesson:** Lesson 4 of 8 — 9 min - **Terms taught:** [Budget](https://lopifi.com/md/glossary/budget), [Variance](https://lopifi.com/md/glossary/variance), [Flexed budget](https://lopifi.com/md/glossary/flexed-budget), [Flux analysis](https://lopifi.com/md/glossary/flux-analysis), [Materiality](https://lopifi.com/md/glossary/materiality), [Accrual basis](https://lopifi.com/md/glossary/accrual-basis), [Prepaid expense](https://lopifi.com/md/glossary/prepaid-expense) - **Previous:** [Payroll and tax dates in the forecast, Finance · Lesson 3](https://lopifi.com/md/learn/13-week-cash-flow-forecast/payroll-and-tax-dates-in-the-forecast) - **Next:** [The flexed budget](https://lopifi.com/md/learn/budget-vs-actual-variance-analysis/flexed-budget) - **The course:** https://lopifi.com/md/learn