Question

Is it better to amend a budget or allow for budget variances? Why? Please cite your sources.

Answer 1

It is better to amend a budget or allow for budget variances as to avoid Errors due to changing business conditions and unmet expectations. Errors by the creators can occur when the budget is being compiled. There are a number of reasons for this, including faulty math, using the wrong assumptions and relying on stale or bad data. Changing business conditions, including changes in the overall economy, can cause budget variances. There could be a change in the cost of raw materials or a new competitor could have cropped up to create pricing pressure. Political and regulatory changes that were not accurately forecast are also included. Budget variances also occur when management exceeds or under-performs expectations.

A variance should be indicated as favorable since the revenue comes in higher than budgeted or expenses are lower than predicted. The result could be greater income than originally forecast.