Variance in Budgeting

Comparisons of actual to budgeted results allows you to consider whether corrective action is needed. The difference between the actual results and budgeted results is called the variance.
The variance can be favorable, when the actual results are better than expected—or unfavorable, when the actual results are worse than expected.

Unfavorable variances require corrective action so that future results will be closer to budget. If you cannot affect a particular expense or revenue item, you may be able to compensate by taking action that will cause an offsetting variance in other budget line items.

Sometimes variances are artificially created—for example, if the company's accounting software automatically spreads line item expenses over a 12-month period and the actual expenditure only occurs once a year, you will have a favorable variance in some months and an unfavorable variance in others.

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