Budget variance definition

A positive variance occurs when actual results exceed the budgeted results, while a negative variance occurs when actual results fall short of the budgeted results. The only variance is the result of Mark’s decision to cut his travel and entertainment budget for this year (i.e., giving up his vacation) to offset the costs of the roof. He is planning that capital expenditure for October, which (as seen in Figure 5.12 “Mark’s Alternative Cash Budget”) will actually make it cheaper to do.

A flexible budget variance is any difference between the results generated by a flexible budget model and actual results. If actual revenues are inserted into a flexible budget model, this means that any variance will arise between budgeted and actual expenses, not revenues. In other cases, operating conditions since a budget was formulated may be the chief cause of a variance. For example, a decline in the economy may have triggered a slide in customer purchases, resulting not only in a sales decline, but also in expense cuts by management. There may also be cases in which changes in the amount of expenses incurred will unavoidably be different from the budgeted amount. For example, a business may not be able to fill a position for an extended period of time, resulting in a lower compensation expense than expected.

This can be a tricky concept to understand, due to the connotations involved with the words positive and negative.

How are Budget Variances Used in Performance Evaluations?

These variances can highlight areas for cost savings or process improvements. Financial managers can use this information to streamline operations, adopt best practices, or invest in workforce training to enhance productivity. This is another favorable variance, as the expense was lower than anticipated.

Related Read: Follow along these budget process steps for small businesses. (With free budget template)

A negative variance means that the actual amount is lower than the budgeted amount, which can indicate an unfavorable performance or an underestimation of the budget. The variance percentage shows how significant the deviation is in relation to the budget. Did you have too many direct labor hours without a corresponding increase in revenue?

If a marketing campaign consistently yields favorable variances, maybe it’s time to allocate more budget there or explore similar strategies. Need help understanding your budget variances or the difference between a balance sheet vs P&L or cash flow forecasts? Hire an outsourced financial controller that is dedicated to helping businesses do just that.

The Basic Formula and Examples

Market factors play a pivotal role in budget variance, often acting as an accelerator or a brake on your financial plans. Shifts in the economy, fluctuations in demand, or changes in commodity prices can all steer your actuals away from your budgeted figures. By staying vigilant to these external forces and adapting swiftly, you can mitigate their impact on your budget’s performance. A budget variance fundamentally is the difference between what you expected to spend or earn, and what actually transpired. Whether it’s about money coming in (revenue) or going out (expenses), this variance is your reality check, reflecting the financial pulse of your business operations. Printing Company XYZ budgeted $250,000 for the production, marketing, and distribution of its business cards.

Your accounting questions answered.

• Analyzing these differences allows businesses to determine where they are under or over-performing financially, offering insights into necessary strategic adjustments.
• A positive variance in expenses means actual expenses exceeded the budget, which is not a positive event (i.e., it is undesirable).
• Conversely, if the budgeted expenditure was $80,000 and the actual expenditure touched $85,000, this would reflect a $5,000 or 6.25% unfavorable variance.
• Those budget variances that are uncontrollable usually originate in the marketplace, when customers do not buy the company’s products in the quantities or at the price points anticipated in the budget.

It can also help identify the causes of deviations and take corrective actions if needed. Budget variance is the difference between the planned or expected amount of revenue or expense and the actual amount. It is an important tool for measuring the performance of a business, project, or department and identifying areas of improvement or adjustment. Budget variance can be classified into different types based on the nature, cause, and impact of the deviation. In this section, we will discuss some of the common types of budget variance and how to calculate and analyze them.

• One teaches the need for a contingency plan for cost fluctuation, while the other prompts looking for savings opportunities in budget allocations.
• The company may assume that a project will cost less than it ends up costing, whether due to a lack of accurate information about costs or unexpected expenses.
• When peeking into the world of budget models, you’ll find a medley of variances that caters to different needs and scenarios.
• A positive variance means that the actual amount is higher than the budgeted amount, which can indicate a favorable performance or an overestimation of the budget.
• Calculating budget variance can help identify the areas where the performance is deviating from the expectations and take corrective actions if needed.

Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy. It can be positive or negative, indicating that the budget was overestimated or underestimated, respectively. Budget variance can be used to measure the performance of an organization, a project, a department, or an individual.

You can also easily set this up as a dynamic spreadsheet template or as a dashboard depending on your tech stack to automatically calculate your variances each month. Your budget vs. actual report is a budget variance definition great place to look for the answers. Here are five strategies you can employ to address variances as soon as you spot them.

One teaches the need for a contingency plan for cost fluctuation, while the other prompts looking for savings opportunities in budget allocations. Embedding these practices into your routine ensures a finger on the pulse of your financial health and the ability to steer your finance strategy with precision. Doing this calculation across all budget areas lets you pinpoint where attention is most needed.

budget variances – Key takeaways

A favorable budget variance or positive variance is any actual amount differing from the budgeted amount that is good for the company. Meaning actual revenue that was more than expected, or actual expenses or costs that were less than expected. Depending on the size and complexity of the project or organization, the budget variance report may cover different levels of detail and time periods. For example, a monthly report may focus on the major categories of expenses and revenues, while a quarterly report may provide a more granular breakdown of the items. The scope and frequency of the report should be aligned with the needs and expectations of the stakeholders, such as the project sponsors, the senior management, or the board of directors. Imagine ABC Ltd., a shoe manufacturer, budgeted $10,000 for marketing in January but ended up with actual expenses of $12,000.