Budget variance

This refers to the difference between the actual amount spent or received and the amount that was planned (budgeted).

It is most typically used to monitor spending during a financial year compared with the estimates made at the start of the year. Variances can be favourable (where spend is lower or income is higher than budgeted) or adverse (where spend is higher or income is lower). Where variances occur, managers should investigate to identify the root cause of the difference. It may be that the budget figure was estimated poorly or that costs are rising faster than expected – each would require very different action by the manager. In some cases variances may be the result of timing, for example an invoice expected in May arrives in April, it is therefore necessary to monitor the trend of variances as well as each specific variance.

Budget variance is a term normally found in management accounting, financial management and performance management.

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