What Is Inventory Variance?

Inventory variance is a common business occurrence in which the amount of inventory in a store is less than what records imply. The easiest way to discover inventory variance is to have someone scan the entire store’s inventory and compare the actual inventory with inventory records. After a variance is discovered, managers can choose to ignore it or be proactive in limiting future variance. Causes for this variance may be external or internal theft, items being lost, or items being destroyed and not recorded. Stores tend to aim for a variance of 2 percent or less, and figures higher than this may become an issue.

There are several ways to discover inventory variance, but the most common way is by having an employee scan all items in the store or in a particular department, such as men’s shoes in a shoe store. After an employee scans the inventory, a manager typically will compare the scanned values with the inventory values recorded in the business’s database. If the database shows a different amount, then there is variance. Variance can be higher than the database amount, but this is rare and typically not serious.

When inventory variance is discovered, managers can decide how to approach the situation. Some managers may see this as a temporary occurrence and believe that attempting to reduce the variance would just be a wasted effort. Other managers may go through records and videos to see why the variance happened, and they may make rules and policies to try to reduce the variance. Most stores have policies stating that managers have to report variances to upper management and work to fix them.

The reasons for inventory variance are varied, but there are a few common causes. Theft is one of the most common and malignant, and it can be either internal or external theft that causes a variance. Another possibility is that the items are just lost and, after some searching, they may be found. If products need to be destroyed because there are production errors or someone returns used merchandise, then it may cause a variance if the destruction is not recorded.

Inventory variance can destroy profits, so most businesses aim for a low variance percentage. The common aim for most businesses is 2 percent, but some try for 1 percent or less. If the variance is much higher than this, such as 5 or 10 percent, this may raise serious concerns and these businesses may need to be closed.