budget variance analysis

A budget to actual variance analysis is a process by which a company's budget is compared to actual results and the reasons for the variance are interpreted. The purpose of all variance analysis is to provoke questions such as: Why did one division, product line or service perform better (or worse) than the others?

1. What is budget variance?
2. How do you calculate budget variance?
3. Why is budget variance analysis important?
4. What is an acceptable budget variance percentage?
5. How do you explain variance?
6. How is variance calculated?
7. What are the types of variance?
8. What is budget formula?
9. How do you calculate monthly variance?
10. What are the 3 types of budgets?
11. What are the disadvantages of variance analysis?
12. How variance analysis is done?

What is budget variance?

Budget variance equals the difference between the budgeted amount of expense or revenue, and the actual cost. Favourable or positive budget variance occurs when: Actual revenue is higher than the budgeted revenue. Actual expenses are lower than the budgeted expenses.

How do you calculate budget variance?

To calculate a static budget variance, simply subtract the actual spend from the planned budget for each line item over the given time period. Divide by the original budget to calculate the percentage variance.

Why is budget variance analysis important?

Importance of Variance Analysis

Planning: Helps managers to budget smarter and more accurately. Control: Assists in more significant control management of departments and budgeting. Responsibility: Helps with the assignment of trust within an organisation. Monitoring: Helps to monitor success and failure.

What is an acceptable budget variance percentage?

Most companies devote 4-8 weeks to their annual budgeting cycle. the majority of companies set an acceptable tolerance level for variances from actual to budget (for revenue, expenses, eBIt and cash flow) of +/- 5–10%. Few go beyond 0% and if so, they were companies less than $ 0 million.

How do you explain variance?

Usually, variance reports are used to analyze the difference between budgets and actual performance. The variance report is also called, “budget variance” or simply “variance,” depending on the financial outcomes you're comparing. “Variance” is the difference between the budgeted/baseline goal and the actual reality.

How is variance calculated?

The variance is a measure of variability. It is calculated by taking the average of squared deviations from the mean. Variance tells you the degree of spread in your data set. The more spread the data, the larger the variance is in relation to the mean.

What are the types of variance?

Types of Variance (Cost, Material, Labour, Overhead,Fixed Overhead, Sales, Profit)

• Cost Variances.
• Material Variances.
• Labour Variances.
• Overhead (Variable) Variance.
• Fixed Overhead Variance.
• Sales Variance.
• Profit Variance. Conclusion.

What is budget formula?

The basic budget equation states that: Income – Expenditure = Profit. To determine an initial amount for your budget, there are three main areas to consider; your business's sales income, including all possible income streams, the total business expenditure for the budgeted period, and your estimated profits.

How do you calculate monthly variance?

You calculate the percent variance by subtracting the benchmark number from the new number and then dividing that result by the benchmark number. In this example, the calculation looks like this: (150-120)/120 = 25%.

What are the 3 types of budgets?

There are three kinds of budget -- balanced budget, surplus budget or a deficit budget.

What are the disadvantages of variance analysis?

Disadvantages Variance analysis has a major drawback in that it takes a long time to examine the effect of the variance and therefore corrective actions are delayed. The monitoring tool results in large lag time and therefore application of control measures will be significantly delayed.

How variance analysis is done?

Variance analysis is the quantitative investigation of the difference between actual and planned behavior. This analysis is used to maintain control over a business. For example, if you budget for sales to be $10,000 and actual sales are $8,000, variance analysis yields a difference of $2,000.