Budget Variance
Budget variance refers to the difference between actual spending or revenue and the budgeted forecast. It can be a positive variance (where actual results are better than the budget) or a negative variance (where actual results fall short of the budget).
Definition: Budget variance refers to the difference between actual expenditures or revenues and budgeted forecasts. It can be a positive variance (actual results exceed the budget) or a negative variance (actual results fall short of the budget).
Origin: The concept of budget variance originated from the need for corporate management and financial control. As early as the early 20th century, with the expansion of enterprise scale and the increase in management complexity, companies began to adopt budget management to plan and control financial activities. Budget variance analysis, as a tool, helps management identify and explain the differences between actual results and the budget, thereby improving decision-making and management.
Categories and Characteristics: Budget variance can be divided into several types, mainly including revenue variance, cost variance, and profit variance.
- Revenue Variance: The difference between actual revenue and budgeted revenue. A positive variance indicates that actual revenue exceeds budgeted revenue, while a negative variance indicates that actual revenue is below budgeted revenue.
- Cost Variance: The difference between actual costs and budgeted costs. A positive variance indicates that actual costs are below budgeted costs, while a negative variance indicates that actual costs exceed budgeted costs.
- Profit Variance: The difference between actual profit and budgeted profit. A positive variance indicates that actual profit exceeds budgeted profit, while a negative variance indicates that actual profit is below budgeted profit.
Specific Cases:
- Case 1: A company budgeted sales revenue of 1 million yuan at the beginning of the year, but actual sales revenue was 1.2 million yuan, resulting in a positive revenue variance of 200,000 yuan. This may be due to increased market demand or effective sales strategies.
- Case 2: A manufacturing company budgeted production costs at 500,000 yuan, but actual production costs were 600,000 yuan, resulting in a negative cost variance of 100,000 yuan. This may be due to rising raw material prices or low production efficiency.
Common Questions:
- Question 1: Why do budget variances occur?
Answer: Budget variances can be caused by various factors, including market changes, cost fluctuations, and management decision errors. - Question 2: How to deal with negative budget variances?
Answer: Methods to deal with negative budget variances include adjusting the budget, improving management processes, and optimizing resource allocation.
