Variance Analysis

Concept

Theoretically, Variance Analysis is a quantitative method used to compare observed performance with planned or expected performance by decomposing differences into identifiable sources. It is founded on management accounting and performance measurement theory and is used to determine whether deviations arise from changes in price, quantity, efficiency or utilisation. In health economics, it supports the evaluation of differences between projected and actual costs, resource use and budgetary outcomes.

Mathematically, Variance Analysis represents the difference between an actual value and a predetermined standard, budget or expected value. Individual variances may be further decomposed into price and quantity components or other recognised categories depending on the costing framework. The resulting calculations quantify the magnitude and direction of deviations from planned performance.

In practice, Variance Analysis is routinely applied in healthcare budgeting, hospital financial management, budget impact analysis and programme evaluation. Analysts calculate variances using accounting or costing data, investigate material deviations and identify operational, clinical or economic factors responsible for differences between expected and observed results.

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Purpose

Used to evaluate differences between planned and actual performance, identify sources of cost and resource variation, support budgetary control, improve operational efficiency and inform management decision-making in healthcare organisations.

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Mathematical Formulae

Primary Formula

Variance = Actual Value ? Budgeted (or Standard) Value

Supporting Formulae

Cost variance:

CV = AC ? SC

where:

• CV = Cost variance
• AC = Actual cost
• SC = Standard or budgeted cost

Material price variance:

MPV = (AP ? SP) ? AQ

Material usage variance:

MUV = (AQ ? SQ) ? SP

where:

• AP = Actual price
• SP = Standard price
• AQ = Actual quantity
• SQ = Standard quantity

Related Mathematical Methods

• Standard costing
• Budget variance analysis
• Price variance analysis
• Quantity (usage) variance analysis
• Flexible budgeting

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Example

A hospital budgets �2,500,000 for annual pharmaceutical expenditure but incurs actual costs of �2,700,000.

Variance = �2,700,000 ? �2,500,000 = �200,000

The hospital has an unfavourable cost variance of �200,000, which may subsequently be decomposed into price and utilisation variances to identify the underlying causes.

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Excel Implementation

Function	Example Formula	Health Economics Application
Subtraction	=B2-C2	Calculates the variance between actual and budgeted costs.
SUM	=SUM(D2:D20)	Aggregates variances across cost centres or healthcare programmes.
IF	=IF(B2>C2,""Unfavourable"",""Favourable"")	Classifies budget variances for management reporting.
ABS	=ABS(B2-C2)	Calculates the magnitude of the variance regardless of direction.

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VBA (Optional)

Automate variance calculations across departmental budgets and generate exception reports highlighting material favourable and unfavourable variances.

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Sources

• Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes.
• Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation.
• Horngren CT, Datar SM, Rajan MV. Cost Accounting: A Managerial Emphasis.
• Kaplan RS, Atkinson AA. Advanced Management Accounting.
• NICE. Health Technology Evaluation Manual.