Q:

How does one calculate budget variance?

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Quick Answer

Budget variance is calculated using variance analysis to compare planned, or budgeted, amounts to actual amounts. Variance analysis is a quantitative examination of the differences between budgeted and actual amounts, according to AccountingTools.

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Full Answer

Variance analysis is used to determine the differences between planned and actual amounts in a budget. Variance is calculated by subtracting the actual amount from the budgeted amount, explains Bert Markgraf for the Houston Chronicle. Variance analysis is also used to investigate the causes behind these budgetary differences. For example, the loss of a major customer could lead to a budget variance in the sales division. Other reasons for variance could include changes in material cost, changes in labor cost or changes in volume. Using variance analysis on a monthly basis identifies trends on the expense or revenue side that could help explain why the actual amount differs from the budgeted amount. Variance is favorable if the costs are lower than the revenue, and variance is unfavorable if the costs are higher than the revenue.

A budget is used to predict costs and revenue over a period of time in the future, notes Markgraf. Typically, budgets are created from year-to-year and help plan for future sales volumes, revenue, resources, expenses, assets and liabilities.

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