Question

Seminar Assessment 3 Explain what is a budget variance, what causes it and show an example of when it is favorable and unfavorable

Answer 1

Budget Variance : A budget variance is the difference between the budgeted amount of expense or revenue, and the actual amount. The budget variance is favorable when the actual revenue is higher than the budget or when the actual expense is less than the budget.

Causes : A budget variance is frequently caused by bad assumptions or improper budgeting such as using politics to derive an unusually easy budget target, so that the baseline against which actual results are measured is not reasonable.

Also budget variances can occur from controlled or uncontrollable factors. For instance, a poorly planned budget and labor costs are controllable factors. Uncontrollable factors are often external and arise from occurrences outside the company, such as a natural disaster.

Example of favorable and unfavorable:

ABC Company had budgeted $ 400,000 of selling and administrative expenses, and actual expenses are $ 420,000. Thus, there is an unfavorable budget variance of $ 20,000.

However if ABC Company has budgeted $ 400,000 selling and administrative expenses, and actual expenses are $ 380,000. Thus, there is an favorable budget variance of $ 20,000.