What Is a Budget Variance?

This deviation is called your “budget variance.” In other words, it is the difference between your projected amount or the budget and the actual amount realized.

In accounting, your budget variance plays a key role in your management accounts. It can be the basis for analyzing your earning and spending patterns, or for your financial goals. For instance, you can aim for a particular budget variance to achieve a certain level of profitability.

Interpreting your budget variance will only find relevance in these two possible cases:

1. Negative Budget Variance – This occurs when your expenses are greater than your income. This means that either you’re spending more than you earn, more than you expected, or probably more than you that you were aiming for. An unfavorable budget variance could mean losses and shortfalls for your management accounts.
2. Positive Budget Variance – This, on the other hand, is the ideal situation—this can actually mean savings on your part. It can also reflect how effective you are at minimizing your business expenses. So if this is the case for your business, then rejoice! You are properly managing your budget!

With this knowledge in mind, you can strategically plan and control how your management accounts will become more profitable.

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