Budget Variance

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Budget variance is a term used in business and financial analytics to describe the difference between the budgeted or planned amount of an expense or revenue, and the actual amount incurred or received. Understanding budget variances is crucial for businesses to assess their financial performance, identify areas of improvement, and make informed decisions for future planning.

Types of Budget Variances

There are two main types of budget variances: favorable and unfavorable. A favorable budget variance occurs when the actual amount is less than the budgeted amount, resulting in cost savings or higher revenues than expected. On the other hand, an unfavorable budget variance occurs when the actual amount exceeds the budgeted amount, leading to higher costs or lower revenues than planned.

Causes of Budget Variances

There are several factors that can contribute to budget variances, including:

  • Changes in market conditions
  • Unexpected expenses
  • Inaccurate budgeting
  • Operational inefficiencies
  • Price fluctuations

Analysis of Budget Variances

Analyzing budget variances involves comparing the actual financial results with the budgeted amounts and identifying the reasons for the differences. This analysis helps businesses understand their financial performance and take corrective actions to stay on track with their financial goals.

Methods of Analyzing Budget Variances

There are several methods that businesses use to analyze budget variances, including:

Method Description
Variance Analysis Comparing actual results with budgeted amounts to determine the reasons for the differences.
Trend Analysis Examining the trend of budget variances over time to identify patterns and make predictions.
Root Cause Analysis Identifying the underlying causes of budget variances to address the issues at the source.
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