Question

When creating a budget, how much should you factor variances into such an analysis?

Answer 1

Budget Variance

Budget variance is the difference between budgeted amount and actual amount. In other words, it is the deviation of actual value from the budgeted value.

While preparing the budget, it is good to factor variances into the budget analysis.. Because the Budget variance brings out the deviations in the actual performance by comparing it with budgeted values. Knowledge about the deviations are essential in future decision making.

Budget Variances can be favourable or unfavourable. In the case of a Cash Budget, the Favourable variance is when Actual Revenue is more than the Budgeted Revenue, and Actual Expenses are less than the Budgeted Expenses. Based on the variance analysis, the company may take remedial measures. That is, if the revenue budget shows an unfavourable variance, the firm may take necessary steps to increase its revenue. If the expenses shows unfavourable variance, steps can be taken to control the expenses. Companies prepare various budgets like sales budget, production budget, raw material procurement budget, etc. By analysing the variance, the company may take steps to increase the sales and production.

In short, the Variance analysis is very important in Budgeting. The process of budget preparation is effective only when the company uses Budget Analysis too.