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Variances in Budgets: Definition, Calculations & Analysis

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  • 0:01 Calculating Variances…
  • 1:05 Analyzing Variances
  • 3:00 Lesson Summary
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Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

What are variances in budgets, and why do we calculate them? In this lesson, we discuss what they are, why we care about them, and how to analyze variances in our own reports to obtain information we can use to improve our results.

Calculating Variances in Budgets

Variances in budgets are differences between the company's actual revenues and expenditures and the planned or budgeted amounts. Companies generally create reports on a monthly basis showing the amounts of those variances, and then analyze the reasons for them. Calculating variances is just a subtraction process. Generally, the monthly financial reports will be in this format:

Account Budget Actual Variance

The variance column will be the difference between the budgeted and actual amount for that line in the report. Some companies will also use the formula Budget Amount - Actual Amount = Variance for all accounts. Others will reverse the order of calculation for revenue accounts. In other words, if revenues are higher than budget, that is a positive variance, and if revenues are lower than budget, then that is a negative variance (with this method, expenses still show up as negative variances if they are over budget and positive variances if they are under budget).

Either way, you'll end up with a column of differences that you can scan down to locate the biggest impacts. You'll want to note the outliers in both dollars and percentages, as the significance of the variance will depend on the size of the account.

Analyzing Variances

Analyzing variances to the budget is really the 'meat' of the process. If you run a business or function within a business, when you review your monthly reports you want to know how you're doing, and also if there is anything you need to do differently to have better results. The analysis process gives you that information.

Let's say, for example, that you've received your variance report, and you have actual revenues of $48,000 vs. the $65,000 in the budget. The analysis process is designed to tell you why that occurred. The most common way to look at a revenue variance is using price and volume (or quantity) details. To start with, we pull out our detailed budget to understand how the $65,000 was calculated. When we look into it, we find that it assumed we would sell Product X to 13 customers at $5,000 per installation that month, resulting in a $65,000 budget.

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