What is Budget Variance Analysis?

Budget Variance Analysis is the process of comparing a company’s budgeted financial results with its actual performance to identify, measure, and understand the differences. That is not simply finding one figure that has gone wrong; the true essence is in finding out why the difference has occurred so that the organization can take action before the little problem becomes a bigger one. 

It is similar to GPS for finance; it does not simply assume that the original budget remains right throughout the year, but it continuously calculates actual performance in relation to the budgeted path.

Favorable and Unfavorable Variances

Variance can be categorized into one of these two categories and can never be just referred to as ‘higher’ or ‘lower,’ as ‘higher’ can be either favorable or unfavorable depending on what is being measured:

• Favorable variance: Revenue earned is more than the budgeted amount, or the actual expenditure incurred is less than what was budgeted.
• Unfavorable variance: Revenue earned is less than the budgeted amount, or the actual expenditure incurred is more than budgeted.

How the Variance Budgeting Process Usually Works

• Set the budget: Develop expected revenue and expense figures for a given period (monthly, quarterly, or annually).
• Track actuals: Record actual financial results as they occur during the period.
• Calculate variance:  Compare actual results to budgeted figures line by line to identify discrepancies.
• Find the root of a variance: Whether it’s a pricing change, an unexpected cost, a change in demand, or a planning miss.
• Refine and predict: Use that information to adjust course, improve future budgets, and get better at predicting. 

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