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What is Budget Variance?
Budget variance is a periodic measure used by governments, corporations or individuals to quantify the difference between budgeted and actual figures for a particular accounting category. A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, meaning losses and shortfalls. Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy.
Budget variances can occur from controlled or uncontrollable factors. For instance, a poorly planned budget and labor costs are controllable factors. Uncontrollable factors are often external and arise from occurrences outside the company, such as a natural disaster.
Understanding Budget Variance
There are three primary causes of budget variance: errors, changing business conditions and unmet expectations. Errors by the creators of the budget can occur when the budget is being compiled. There are a number of reasons for this, including faulty math, using the wrong assumptions or relying on stale/bad data. Changing business conditions, including changes in the overall economy and even global trade, can cause budget variances. There could be a change in the cost of raw materials or a new competitor could have entered the market to create pricing pressure. Political and regulatory changes that were not accurately forecast are also included in this category. Of course, budget variances also occur when the management team exceeds or underperforms expectations.
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