A Budget Variance is a calculation that compares the planned and actual expenses of a business. It measures the amount of money that is either over or under the original budget allocation. Budget variances are used to measure the efficiency of a business plan and its performance. There are three types of budget variances: positive, negative and zero. Positive (or favorable) budget variance occurs when actual expenses are less than the original budget. This means that you have saved money due to lower than expected costs. Negative (or unfavorable) budget variance occurs when actual expenses are higher than the original budget. This means that you have spent more money due to higher than expected costs. Zero budget variance occurs when actual expenses are equal to the original budget. This means that you have spent exactly what you planned.The following steps will help you understand how to read a budget variance report:1) Calculate the Budget VarianceCalculate the difference between(a)The Actual Cost for each expense category (b)The Budgeted Cost for each expense category2) Identify the type of variance(a) Positive (favorable)3) Calculate the percent of variance(a) If the variance is favorable, then calculate the percent as:(b) If the variance is unfavorable, then calculate the percent as:(c) If the variance is zero, then calculate the percent as:4) Identify whether the variance is favorable or unfavorableA favorable variance means that actual expenses were less than the original budget. A favorable variance occurs when actual expenses are less than the original budget. This means that you have saved money due to lower than expected costs. A zero variance means that actual expenses were equal to the original budget. A zero variance occurs when actual expenses are equal to the original budget. This means that you have spent exactly what you planned. An unfavorable variance means that actual expenses were higher than the original budget. An unfavorable variance occurs when actual expenses are higher than the original budget. This means that you have spent more money due to higher than expected costs.5) Identify if an unfavorable variance should be revised upwards or downwardsA downward variance should be revised downward. A downward variance means that actual expenses were less than the original budget. This means that you have saved money due to lower than expected costs. A downward variance is favorable, but it is also less than zero. Therefore, it should be revised downwards so that the variance will be a negative number, which is more understandable to the reader and easier to communicate. An upward variance should be revised upwards. An upward variance means that actual expenses were higher than the original budget. This means that you have spent more money due to higher than expected costs. An upward variance is unfavorable, but it is also greater than zero. Therefore, it should be revised upwards so that the variance will be a positive number, which is more understandable to the reader and easier to communicate.
