What is a budgeting variance?
A budget variance measures how far actual results moved from the budget:
Variance = Actual − Budget
- Favourable (F): revenue higher than budget, or costs lower than budget.
- Unfavourable or adverse (U/A): revenue lower than budget, or costs higher than budget.
It is often shown as an amount and a percentage of budget.
Types of variances
- Revenue variance: split into a price variance (selling at a different price) and a volume variance (selling a different quantity).
- Cost variance: split into price (paying more or less per unit) and usage or efficiency (using more or fewer units).
- Fixed overhead variance: spending above or below the fixed cost budget.
Example
A business budgeted marketing spend of $5,000 and actually spent $6,200. The variance is $1,200 unfavourable (24%). Sales were budgeted at $50,000 and came in at $56,000, a $6,000 favourable variance. The extra marketing may have paid for itself.
How to run a variance analysis
- Compare budget and actual line by line each month.
- Focus on variances above a set threshold, such as 10% or a fixed amount.
- Find the cause: timing, price, volume, one-off events or errors.
- Decide what to do: act, accept or update the forecast.
A flexible budget, adjusted to actual activity levels, gives a fairer comparison for variable costs.
Why it matters
Variances turn a budget from a static document into a management tool. They show where the business is beating or missing plan and why.