EDUCBA

EDUCBA

MENUMENU
  • Explore
    • Lifetime Membership
    • All in One Bundles
    • Fresh Entries
    • Finance
    • Data Science
    • Programming and Dev
    • Excel
    • Marketing
    • HR
    • PDP
    • VFX and Design
    • Project Management
    • Exam Prep
    • All Courses
  • Blog
  • Enterprise
  • Free Courses
  • Log in
  • Sign up
Home Finance Finance Resources Finance Formula Variance Analysis Formula

Variance Analysis Formula

Madhuri Thakur
Article byMadhuri Thakur

Updated June 2, 2023

Variance-Analysis-Formula

Variance Analysis Formula (Table of Contents)

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

  • Formula
  • Examples

What is the Variance Analysis Formula?

Variance analysis is a pretty important formula in portfolio management and other financial and business analyses. We can measure the quantitative formula as the difference between planned and actual numbers. The formula is heavily used in cost analysis to check the variance between the planned or the standard cost versus the actual cost. The analysis helps the management to keep a check on the company’s operational performance.

The formula For Variance Analysis is given below

Variance = (X – µ)2 / N
  • X stands for the value of individual data point
  • µ stands for the average or the mean of the individual data point
  • N stands for the number of individual data points in a given array

Variance analysis formula is used in a probability distribution set up and variance as also be defined as the measure of risk from an average mean. Variance also depicts how much the investor is able to assume the risk when purchasing a specific security.

Examples of Variance Analysis Formula (With Excel Template)

Let’s take an example to understand the calculation of the Variance Analysis in a better manner.

You can download this Variance Analysis Formula Excel Template here – Variance Analysis Formula Excel Template

Example #1

Consider a data set having the following observations 2,3,6,6,7,2,1,2,8. We need to calculate the variance analysis.

Variance Analysis Formula Example 1-1

The solution to the following problem can be solved by taking the following steps:

The mean is calculated as follows:

Variance Analysis Formula Example 1-2

We must calculate the difference between the data points and the mean value.

Variance Analysis Formula Example 1-3

Similarly, calculate all values of the data set.

Variance Analysis Formula Example 1-4

Calculate the square of the difference between data points and the mean value.

Variance Analysis Formula Example 1-5

Variance Analysis is calculated using the formula given below

Variance = (X – µ)2 / N

Variance Analysis Formula Example 1-6

In the first step, we calculated the mean by summing (2+3+6+6+7+2+1+2+8)/number of observations, giving us a mean of 4.1. Then in column 2, we calculated the difference between the data points and the mean value and squaring each value individually. After that, summing up column C and dividing it by the number of observations gives us a variance of 5.8.

Example #2

The heights of the dogs in a given set of random variables are 300 mm, 250 mm, 400 mm, 125 mm, 430 mm, 312 mm, 256 mm, 434 mm, and 132 mm. Calculate the variance analysis of the data set from the mean.

Variance Analysis Formula Example 2-1

The solution to the following problem can be solved by taking the following steps:

Mean is calculated as:

Variance Analysis Formula Example 2-2

We must calculate the difference between the data points and the mean value.

Variance Analysis Formula Example 2-3

Similarly, calculate for all values of the data set.

Variance Analysis Formula Example 2-4

Calculate the square of the difference between data points and the mean value.

Variance Analysis Formula Example 2-5

We calculate Variance Analysis using the formula provided below

Variance = (X – µ)2 / N

Variance Analysis Formula Example 2-6

In the first step, we calculated the mean by summing (300+250+400+125+430+312+256+434+132)/number of observations, giving us a mean of 293.2. Then in column 2, we calculated the difference between the data points and the mean value and squaring each value individually. After that, summing up column C and dividing it by the number of observations gives us a variance of 11985.7.

Example #3

The marks gained by the students selected from a large sample of 100 students are 12, 15, 18,24,36, and 10. Calculate the variance analysis of the data from the mean.

Example 3-1

The solution to the following problem can be solved by taking the following steps:

We calculate the mean as follows:

Calculation of Mean Example 3-2

We must calculate the difference between the data points and the mean value.

Difference betweendata points and mean value Example 3-3

Similarly, calculate for all values of the data set.

Example 3-4

Calculate the square of the difference between data points and the mean value.

Example 3-5

We calculate Variance Analysis using the formula provided below

Variance = (X – µ)2 / N

Variance Analysis Formula Example 3-6

In the first step, we calculated the mean by summing (12+15+18+24+36+10)/number of observations, giving us a mean of 19.2. Then in column 2, we calculated the difference between the data points and the mean value and squaring each value individually. After that, summing up column C and dividing it by the number of observations gives us a variance of 76.8

Explanation

We calculate the variance analysis formula using the following steps:-

Step 1: Calculate the mean of the number of observations present in the data array, which can be calculated by a simple mean formula which is the sum of all the observations divided by the number of observations.

Step 2: After calculating the mean of the observations, we subtract the mean from each observation to calculate each observation’s deviation from the mean.

Step 3: We sum and square the difference of each observation to avoid negative-positive signage and then divide it by the number of observations.

Relevance and Uses of Variance Analysis Formula

We can use variance analysis in the following areas:-

  • Portfolio Management
  • Calculation of stock and portfolio return
  • The business frequently uses the comparison of Budget vs Actual Cost.
  • Forecasting of cost and revenue
  • Materiality
  • Relationships between two variables

Recommended Articles

This has been a guide to Variance Analysis Formula. Here we discuss how to calculate the Variance Analysis along with practical examples and a downloadable Excel template. You may also look at the following articles to learn more –

  1. Percent Error Formula with Calculator
  2. Examples of Regression Formula with Excel Template
  3. What is Relative Standard Deviation Formula?
  4. How to Calculate Correlation?
ADVERTISEMENT
All in One Excel VBA Bundle
500+ Hours of HD Videos
15 Learning Paths
120+ Courses
Verifiable Certificate of Completion
Lifetime Access
ADVERTISEMENT
Financial Analyst Masters Training Program
2000+ Hours of HD Videos
43 Learning Paths
550+ Courses
Verifiable Certificate of Completion
Lifetime Access
ADVERTISEMENT
All in One Data Science Bundle
2000+ Hour of HD Videos
80 Learning Paths
400+ Courses
Verifiable Certificate of Completion
Lifetime Access
ADVERTISEMENT
All in One Software Development Bundle
5000+ Hours of HD Videos
149 Learning Paths
1050+ Courses
Verifiable Certificate of Completion
Lifetime Access
Primary Sidebar
Footer
About Us
  • Blog
  • Who is EDUCBA?
  • Sign Up
  • Live Classes
  • Certificate from Top Institutions
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions
  • Privacy Policy
  •  
Apps
  • iPhone & iPad
  • Android
Resources
  • Free Courses
  • Investment Banking Jobs Offer
  • Finance Formula
  • All Tutorials
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course

ISO 10004:2018 & ISO 9001:2015 Certified

© 2023 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you

EDUCBA

Download Variance Analysis Formula Excel Template

Let’s Get Started

By signing up, you agree to our Terms of Use and Privacy Policy.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you

EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA

*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA Login

Forgot Password?

EDUCBA

डाउनलोड Variance Analysis Formula Excel Template

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Loading . . .
Quiz
Question:

Answer:

Quiz Result
Total QuestionsCorrect AnswersWrong AnswersPercentage

Explore 1000+ varieties of Mock tests View more

🚀 Extended Cyber Monday Price Drop! All in One Universal Bundle (3700+ Courses) @ 🎁 90% OFF - Ends in ENROLL NOW