Budget Variance

Published Feb 7, 2023

Definition of Budget Variance

Budget variance is the difference between the expected results of a budget and the actual results. That means it is a measure of how much higher or lower actual costs or revenues are, relative to the projected values. This variance is usually expressed as a percentage or a dollar amount.

Example

Let’s look at a simple example to illustrate this. Imagine a company that has set a budget for the upcoming year. This budget includes expected revenues, expenses, and profits. Now, at the end of the year, the company compares its actual results with the budgeted results. If the actual results are higher or lower than the budgeted results, then there is a budget variance.

For instance, let’s assume the company budgeted for USD 100,000 in revenue but only made USD 90,000. That means there is a budget variance of -10%. Similarly, if the company budgeted for USD 50,000 in expenses but only spent USD 45,000, then there is a budget variance of +10%.

Why Budget Variance Matters

Budget variance is an important tool for individuals and companies to track the performance of their budgets. It allows them to identify areas where their budget is over or under performing and take corrective action if necessary. It also helps them to identify potential problems before they become too large and costly.

In addition to that, budget variance can be used to compare the performance of different departments or divisions within an organization. This allows managers to identify areas of strength and weakness and allocate resources accordingly.