unit 9 what is udget variance course hero

What would be the unfavorable variance of $50,000?

Similarly, if expenses were projected to be $200,000 for the period but were actually $250,000, there would be an unfavorable variance of $50,000, or 25%.

What Is a Budget Variance?

A budget variance is a periodic measure used by governments, corporations, or individuals to quantify the difference between budgeted and actual figures for a particular accounting category. A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, indicating losses or shortfalls. Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy.

What is the significance of budget variance?

Significance of a Budget Variance. A variance should be indicated appropriately as "favorable" or "unfavorable.". A favorable variance is one where revenue comes in higher than budgeted, or when expenses are lower than predicted. The result could be greater income than originally forecast. Conversely, an unfavorable variance occurs ...

What is an unfavorable budget?

An unfavorable, or negative, budget variance is indicative of a budget shortfall, which may occur because revenues miss or costs come in higher than anticipated.

What happens if a variance is material?

The definition of material is subjective and different depending on the company and relative size of the variance. However, if a material variance persists over an extended period of time, management likely needs to evaluate its budgeting process.

Why did the company only generate $200,000 in sales?

However, the company only generated $200,000 in sales because demand fell among consumers. The unfavorable variance would be $50,000, or 20%. Similarly, if expenses were projected to be $200,000 for the period but were actually $250,000, there would be an unfavorable variance of $50,000, or 25%.

What is budget variance?

Budget variance deals with a company’s accounting discrepancies. The term is most often used in conjunction with a negative scenario. An example is when a company fails to accurately budget for their expenses – either for a given project or for total quarterly or annual expenses.

Why is it important to discuss adverse budget variance?

It’s important to discuss adverse (or negative) budget variance further because of its damaging and potentially severe consequences for a business.

Can budget variance be avoided?

Sometimes, the budget variance can be easily avoided. To get a clearer picture, consider the following example:

Do companies report a positive budget variance?

Many companies report a positive budget variance. In order to do so, most companies establish a well-padded budget for individual projects or operations in general. They try to be as accurate as possible in allowing for expenses, with a built-in buffer of extra funds to guard against certain costs, namely:

Is a budget variance positive or negative?

Ultimately, a budget variance can be positive or negative. It’s important for a company to check its accounting records to clarify and clear up any simple budgeting variances and address significant variances in order to get a clearer idea of where it stands financially.

When is a budget variance positive?

When actual figures are superior over the budgeted ones, it is a positive or favorable budget variance. On the other hand, if the real numbers fall short of the budgeted or estimated numbers, it will signify a negative or unfavorable budget variance. In simple words, it will be a loss for the company.

What is a Flexible Budget Variance?

A flexible budget is a financial plan with scope for change in the value of its key parameters. It is according to the level of activities undertaken by the organization over a defined period. On the other hand, a static budget is a financial plan without any scope for change. For example, if a company decides that it will supply 10000 units of a product per month and no more or less, it is a case of a static budget. Flexible budget variance is the variance between the actual figures or estimates, and the figures previously estimated. It is of use to commercial organizations, government, and even individuals.

Why do companies face significant deviations from their budgeted figures?

A company may face significant deviations from its budgeted figures because of poor planning and control of its key activities. Sales and other activities that affect cost-drivers may not work the same as originally planned.

What are the factors that can vary during the budget period?

Besides the above, there are many more factors that can vary during the budget period, like operating regulatory changes, taxation changes, import or export restrictions, interest rate changes, dumping duties, quota restrictions, currency rate variation, etc. And all these factors are beyond the control of the organization. Hence, forecasts of the management can go wrong and lead to variances in the budget.

Types of Budget Variance

• 1. Adverse Variance
  It’s important to discuss adverse (or negative) budget variance further because of its damaging and potentially severe consequences for a business. One of the most common ways that a company experiences adverse budget variance is through poor estimations of future spendings…
• 2. Positive Variance
  Many companies report a positive budget variance. In order to do so, most companies establish a well-padded budget for individual projects or operations in general. They try to be as accurate as possible in allowing for expenses, with a built-in buffer of extra funds to guard against certain co…

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Example of Budget Variance

Simple Solutions to Budget Variance

Final Word

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