A budget variance is the difference between the budgeted or baseline amount of expense or revenue, and the actual amount. The budget variance is favorable when the actual revenue is higher than the budget or when the actual expense is less than the budget.
In rare cases, the budget variance can also refer to the difference between actual and budgeted assets and liabilities.
A budget variance is frequently caused by bad assumptions or improper budgeting (such as using politics to derive an unusually easy budget target), so that the baseline against which actual results are measured is not a reasonable measure against which the results of a business should be measured.
Those budget variances that are controllable are usually expenses, though a large portion of expenses may be committed expenses that cannot be altered in the short term. Truly controllable expenses are discretionary expenses, which can be eliminated without an immediate adverse impact on profits.
Those budget variances that are uncontrollable usually originate in the marketplace, when customers do not buy the company's products in the quantities or at the price points anticipated in the budget.
Some budget variances can be eliminated through the simple aggregation of line items in the budget. For example, if there is a negative electricity budget variance of $2,000 and a positive telephone expense budget variance of $3,000, the two line items could be combined for reporting purposes into a utilities line item that has a net positive variance of $1,000.
As an example of a budget variance, ABC Company had budgeted $400,000 of selling and administrative expenses, and actual expenses are $420,000. Thus, there is an unfavorable budget variance of $20,000. However, the budget used as the baseline for this calculation did not include a scheduled rent increase of $25,000, so a flaw in the budget caused the variance, rather than any improper management actions.