Budget variance deals with a company’s accounting discrepancies. The term is most often used in conjunction with a negative scenario. An example is when a company fails to accurately budget for their expenses – either for a given project or for total quarterly or annual expenses. (The negative variance can also sometimes refer to a discrepancy in budgeting for assets and liabilities).
Types of Budget Variance
1. Adverse Variance
It’s important to discuss adverse (or negative) budget variance further because of its damaging and potentially severe consequences for a business.
One of the most common ways that a company experiences adverse budget variance is through poor estimations of future spendings. The company may assume that a project will cost less than it ends up costing, whether due to a lack of accurate information about costs or unexpected expenses. A company may also experience negative variance if it allows office or industry politics to dictate a target spending that is unreasonably low.
2. Positive Variance
Many companies report a positive budget variance. In order to do so, most companies establish a well-padded budget for individual projects or operations in general. They try to be as accurate as possible in allowing for expenses, with a built-in buffer of extra funds to guard against certain costs, namely:
Unexpected costs connected to supplies
Complications with a project/task
Changes in the market
Company-wide issues (scandal, change in management, procedural/operational changes)
Example of Budget Variance
Printing Company XYZ budgeted $250,000 for the production, marketing, and distribution of its business cards. It includes the cost of the cardstock needed, ink, and labor for the first quarter of the year. However, they ended up spending $265,000 in total. This means that there is an adverse budget variance of $15,000.
Simple Solutions to Budget Variance
Sometimes, the budget variance can be easily avoided. To get a clearer picture, consider the following example:
Company ABC reports an adverse electricity budget of $4,000 and a positive heating budget of $3,000. The company can simplify their accounting and avoid an overly negative variance by combining the two budgets for the purposes of reporting and accounting for their expenses. It means that they will only show an adverse budgeting variance of $1,000, which seems far more manageable than $4,000.
Ultimately, a budget variance can be positive or negative. It’s important for a company to check its accounting records to clarify and clear up any simple budgeting variances and address significant variances in order to get a clearer idea of where it stands financially.
The best solution for avoiding budgeting variances is careful, well-researched, practical budgeting. However, in an uncertain market or economic conditions, there may be variances – either positive or negative – in even the most well-planned spendings.
Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.
A well rounded financial analyst possesses all of the above skills!
Additional Questions & Answers
CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.
In order to become a great financial analyst, here are some more questions and answers for you to discover:
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.