What are Profit Variances?

Profit variance is the difference between the actual profit experienced and the budgeted profit level. It is calculated by subtracting the budgeted profit from the actual profit. The variance is considered to be favorable if the actual profit is greater than the budgeted amount. The variance is considered to be unfavorable if the actual profit is lower than the budgeted amount. For example, a company budgets for $50,000 of net profits. Actual net profits are $60,000. This is a favorable variance of $10,000.

There are four types of profit variance, which are derived from different parts of the income statement. They are noted below.

Gross Profit Variance

The gross profit variance measures the ability of a business to generate a profit from its sales and manufacturing capabilities, including all fixed and variable production expenses.

Contribution Margin Variance

The contribution margin variance is the same as the gross profit variance, except that fixed production costs are excluded.

Operating Profit Variance

The operating profit variance only measures the results of operations; it excludes all financing and extraneous gains and losses. This variance provides the best view of how the core operations of a business are functioning.

Net Profit Variance

The net profit variance is the most commonly-used version of the profit variance. It encompasses all aspects of a company's financial results, without exception.