Variances Are The Differences Between Budgeted and Actual Figures
- You know when you planned to finish your assignment in two hours but end up spending eight on it?
- Maybe you watched a little YouTube, got up for a snack, or simply underestimated how hard it would be to just "write that conclusion."
- That's kind of like variance.
- In business specifically, variance refers to the differences between your planned and actual expenses.
Definition
Variances
The difference between budgeted (planned) figures and actual financial performance, which can be either favourable or adverse.
Types of Variances
- Variance helps managers understand how actual performance aligns with expectations, guiding strategic decisions.
- There are several types of variance:
Favorable Variance
- Occurs when actual performance exceeds expectations.
- For instance:
- Higher Revenue: Sales are higher than forecasted.
- Lower Costs: Expenses are less than budgeted.
Notice how variance is not always a bad thing.
Adverse Variance
- Occurs when actual performance falls short of expectations.
- For instance:
- Lower Revenue: Sales are below forecasted levels.
- Higher Costs: Expenses exceed the budget.
Always analyze the reasons behind variances. A favorable variance might not always be positive if it results from underestimating costs or overestimating revenue.
Definition
Favourable Variances
These occur when actual revenue exceeds budgeted revenue or when actual costs are lower than budgeted costs, leading to improved profitability.
Calculating Variances
The formula for calculating variances is straightforward:
$$\text{Variance} = \text{Actual Figure} - \text{Budgeted Figure}$$
- Positive Variance: Indicates a favourable outcome for revenue but an adverse outcome for costs.
- Negative Variance: Indicates an adverse outcome for revenue but a favourable outcome for costs.
- Don’t assume that a positive variance is always favorable or a negative variance is always adverse.
- It depends on whether you’re analyzing revenue or costs.
Causes of Variances
1. Positive Variances
- Revenue Variances
