Profit variance is the difference between your actual profit in a given period and your projected profit. There are a few specific forms of profit variance, but a simple calculation is to subtract your projected amount from your actual results.
Assume your business projected profit in a given quarter of $200,000. Actual profit was $225,000. In this case, you subtract $200,000 from $225,000 to identify the profit variance of $25,000. If the numbers were reversed, and you projected $225,000 but got $200,000, you would have a negative profit variance of $25,000.
Companies typically report three different types of profit on an income statement: gross profit, operating profit and net profit. While net profit equals your bottom-line results after everything is accounted for, recognizing profit variance at each level allows you to pinpoint areas of strength or weakness.
To calculate gross profit variance, you would subtract your projected gross profit from your actual gross profit, which equals periodic sales minus costs of goods sold. For operating variance, subtract projected operating profit from actual operating profit, which equals revenue minus all COGS and operating expenses. For net profit variance, subtract projected net profit from actual net profit, which equals all regular and irregular revenue minus all regular and irregular expenses.
Any variance calculation which yields a positive result is favorable, whereas a negative variance or lower-than-projected profit is unfavorable. If you have negative gross profit variance, your sales volume might not have reach targeted levels, or you incurred unexpectedly high COGS. Negative operating variance could result from the same causes, or from unexpectedly high operating variance. Negative net profit variance is common when you have an irregular activity such as a large legal cost.
Improved marketing and merchandising can contribute to positive revenue and profit variance. Negotiating lower COGS or operating expense rates are other strategies to optimize profit.