Learn: Calculating Budget Variances

Welcome!Building on what you've already learned about budget variances, this lesson focuses on the practical steps to calculate them accurately. Let’s ensure you fully understand this essential skill for managing business finances!

What is a Budget Variance?A budget variance is the difference between the budgeted amount and the actual amount spent or earned. This is important because it helps businesses assess their financial performance and make informed decisions.

Types of Budget VariancesBudget variances can be favourable (when actual income is higher than expected or expenses are lower) or adverse (when actual income is lower than expected or expenses are higher). Identifying the type of variance is key to understanding its impact.

How to Calculate a Budget VarianceTo calculate a budget variance, use the formula: Budgeted Amount - Actual Amount = Variance. If the result is positive, it’s favourable; if negative, it’s adverse.

Example CalculationImagine a business budgeted £5,000 for advertising but spent £4,500. The variance is £5,000 - £4,500 = £500. This is a favourable variance because the actual expense was lower than budgeted.

Review Time!Great work! You've learned how to calculate budget variances, identify their types, and understand their significance. Let’s test your understanding!

Congratulations!You've successfully learned how to calculate and analyse budget variances. This skill is vital for understanding business performance and making strategic decisions. Keep practising to master it!