To control a budget actual performance is compared to budget.
The difference between budget and actual figures is the budget variance.
Managers should be able explain why these variances have occurred so outcomes are reported to senior managers or owners of the business.
When conditions change in the budget period it is important that managers are actively monitoring the budget to check performance before things get out of control.
A sales budget variance could be the result of;
- A change in economic conditions
- A lack of advertising for the product
- New competitors in the market
- Customers unable to access credit to purchase products
Variances can be ‘Favourable’ (good) or ‘Unfavourable’ (bad).
For expenses– it is better to be under budget – a favourable variance shows being under budget and an unfavourable variance where over budget.
For revenues– it is better to be over budget – a favourable budget shows being over budget and unfavourable variance shows if under budget.
Variances can be based on differences in quantity units or financial figures.
If the variance is about the number of units, such as items of stock, then it is a quantity variance.
If the variance is between dollar figures it is a financial variance.
Example of a Budget and Performance Report with Variances
This example will explain variance so you can understand the topic.