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 budget variances can occur broadly due to either controlled or uncontrollable factors for instance a poorly planned budget and labor costs are controllable factors uncontrollable factors are often external and arise from occurrences outside the company such as a natural disaster investopedia paige mclaughlinunderstanding budget variancesthere are three primary causes of budget variance errors changing business conditions and unmet expectations significance of a budget variancea 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 when revenue falls short of the budgeted amount or expenses are higher than predicted as a result of the variance net income may be below what management originally expected if the variances are considered material they will be investigated to determine the cause then management will be tasked to see if it can remedy the situation 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 budget variance in a flexible budget versus a static budgeta flexible budget allows for changes and updates to be made when assumptions used to devise the budget are altered a static budget remains the same however even if the assumptions change the flexible budget thus allows for greater adaptability to changing circumstances and should result in less of a budget variance both positive and negative for instance assuming production is cut variable costs are also going to be lower under a flexible budget this is reflected and results can be evaluated at this lower level of production under a static budget the original level of production stays the same and the resulting variance is not as revealing it is worth noting that most companies use a flexible budget for this very reason example of unfavorable varianceas an example let s say that a company s sales were budgeted to be 250 000 for the first quarter of the year however the company only generated 200 000 in sales because demand fell among consumers the unfavorable variance would be 50 000 or 20 the company would look at the sales mix variance for each product or product line to help identify problems 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 