Budget variance is the difference between projected financial figures and actual financial performance over a specific period. It helps businesses analyze whether they are over or under budget by comparing actual revenue and expenses to planned estimates.
Budget variance can be favorable (better than expected) or unfavorable (worse than expected), influencing financial decisions and strategy adjustments.
What causes budget variance?
Budget variances can be caused by: Unexpected expenses (e.g., higher supplier costs, inflation). Revenue fluctuations (e.g., lower sales, economic downturns). Operational inefficiencies (e.g., production delays, resource waste). Market changes (e.g., competition, price shifts).
How do businesses analyze budget variance?
Companies use variance analysis to identify why a variance occurred, categorize it as favorable or unfavorable, and take corrective action.
What is the difference between favorable and unfavorable variance?
-Favorable variance: Actual results are better than the budget (e.g., higher revenue, lower costs). -Unfavorable variance: Actual results are worse than the budget (e.g., higher expenses, lower revenue).
How can businesses reduce budget variance?
Companies can improve budget accuracy by: Refining forecasting models based on past data. Monitoring financial performance regularly. Adjusting budgets dynamically to market changes.
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