Budget Variance
IntermediateA budget variance is the difference between a budgeted amount and the actual result, such as actual sales or costs compared with what was planned.
After each month or quarter, businesses compare actual figures with their budget. Each difference is a variance. It is usually shown both as an amount and as a percentage of the budget.
Variances are described as favourable or unfavourable depending on their effect on profit. Higher-than-budgeted revenue or lower-than-budgeted costs are favourable. Lower revenue or higher costs are unfavourable.
For example, if the marketing budget for a quarter was 50,000 and actual spending was 56,000, there is an unfavourable variance of 6,000, or 12%. If sales were budgeted at 400,000 and came in at 420,000, there is a favourable variance of 20,000, or 5%.
The point of variance analysis is not just to spot differences but to understand them. A cost overrun might be due to higher prices, higher volumes or poor control. Higher sales might come from more customers or higher prices. Explaining the main variances helps managers correct problems early and make future budgets more accurate.
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