Cost variances: rate, volume, heads and cost per head
Direct cost and departmental spend against budget.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: cost variances: rate, volume, heads and cost per head.Updated 4 November 2026
What it does
Where the costs went against budget. Direct cost splits into a rate variance, the change in unit cost on the units actually made, and a volume variance, what the change in units cost at plan unit cost. A department’s pay splits into a headcount variance, the heads above or below plan at plan cost per head, and a cost per head variance on the heads actually employed, worked month by month. Non-pay is budget less actual. Spending below budget is favourable and shown positive, so the cost variances add straight into the EBITDA bridge.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Variance, rows 37–40: Direct cost variance, Rate variance, Volume variance, Check: rate + volume - direct cost variance
- Variance, rows 74–77: Direct cost variance, Rate variance, Volume variance, Check: rate + volume - direct cost variance
- Cost Variance, rows 6–11: Budget pay, Actual pay, Pay variance, Headcount variance…
- Cost Variance, rows 14–19: Budget non-pay, Actual non-pay, Non-pay variance, Operating cost variance…
- Cost Variance, rows 22–27: Budget pay, Forecast pay, Pay variance, Headcount variance…
- Cost Variance, rows 30–35: Budget non-pay, Forecast non-pay, Non-pay variance, Operating cost variance…
What a reviewer looks for
- Pay variance reported in total, so hiring behind plan hides a pay rise above it.
- Heads and cost per head multiplied on full-year averages, which leaves a residual a monthly split does not.
- A direct cost overspend on higher volume called adverse without saying that the volume brought margin with it.
Learn it, then build it
Read · Guide · 11 min
Financial Modelling Best Practices: The Conventions That Make a Model Auditable
Vocabulary: EBITDA.