Question

What are budget variances, how are they calculated, and why are they important?

Answer 1

What:

A budget variance is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount.

How to calculate:

The budget variance is calculated by calculating the difference between Actual and Budgeted figures.

The budget variance is favorable when

actual revenue > budget revenue

or

actual expense < budgeted expense

The budget variance is unfavorable/ adverse when

actual revenue < budget revenue

or

actual expense > budgeted expense

Importance:

Budget variance is a way to exercise effective control as the output is in numerical terms. It helps is calculating the devitions from standards set, and also the extent of deviation.

By using Budget variances, the areas of greated variances can be ascertained and accordingly more attention may be given by management on such areas. Thus, it helps to follow management by exception.