What is a budget variance?

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.

A budget variance is frequently caused by bad assumptions or improper budgeting, so that the baseline against which actual results are measured is invalid.

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, where customers do not buy the company's products in the quantities or at the price points anticipated in the budget.

For example, 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.

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