Question

Budget Variance has to do with missed projections in the budgeting process. what is an example of a specific organization of how a favorable budget variance might occur? What is an example of the same organization that details how an unfavorable budget variance could occur?

Answer 1

Budget Variance is computed as (Master Budget - Flexible Budget).

If the variance is computed for costs-
if master budget is more than flexible budget, it denotes favorable variance.
if master budget is less than flexible budget, it denotes unfavorable variance.

If the variance is computed for income-
if master budget is less than flexible budget, it denotes favorable variance.
if master budget is more than flexible budget, it denotes unfavorable variance.

Suppose in a manufacturing industry (highly labor intensified)-

Case (a)- for Favorable Cost Variance
If there is unexpected strike or lockout made by the laborers, the production of goods is low. This would amount to less production cost compared to the budgeted amount leading to a favorable cost variance.

Case (a)- for Unfavorable Cost Variance
If there is unexpected rise in demand of the produced goods, the production of goods is also increased in order to meet the demand. Hence, the production costs would exceed the budgeted amount leading to unfavorable cost variance.