Learn: What a Budget Variance Is

Welcome!Today we'll learn about budget variance. This is an important concept in business finance that helps businesses monitor their performance. Let's break it down step by step!

What is a Budget Variance?A budget variance is the difference between the budgeted amount and the actual amount spent or earned. It helps businesses identify whether they've met financial expectations or need to adjust their plans. Variances can be favourable (better than expected) or adverse (worse than expected).

Why is Budget Variance Important?Budget variance is crucial because it shows how well a business is managing its finances. It helps decision-makers spot problems early, adjust strategies, and improve efficiency. For example, overspending on materials might reveal issues with supplier costs or production inefficiencies.

Types of VariancesThere are two main types of budget variances: favourable and adverse. A favourable variance occurs when actual revenue is higher or costs are lower than budgeted. An adverse variance happens when revenue is lower or costs are higher than expected.

How to Calculate Budget VarianceTo calculate a budget variance, subtract the actual amount from the budgeted amount. If the result is positive, it’s a favourable variance. If it’s negative, it’s an adverse variance.

What Causes Budget Variances?Budget variances can be caused by several factors, including unexpected changes in costs, inaccurate budgeting, or changes in market conditions. For instance, a sudden increase in raw material prices could lead to an adverse variance in production costs.

Review Time!Great work! You've learned about budget variances, their types, how to calculate them, and their causes. Now let's test your understanding with a few questions.