Forecasts and Budgets 179actual amount is called a budget variance. Budget variances are reported for
both revenues and costs separately. In this case, revenues were $20,000 under
budget and are, therefore, considered as an unfavorable budget variance (U).
Expenses, though, were $30,000 less than expected, a favorable budget vari-
ance (F). The net result is a favorable, profit budget variance of $10,000.
Each category is then separately analyzed to uncover the source of the
variance. Although total revenues are lower than expected, management is in-
terested in the actual product lines causing this variance. Further analysis
might reveal, for example, that all of the product lines are performing satisfacto-
rily except for one that is performing more poorly than expected. On the
expense side, a favorable budget variance may be due to positive effects of man-
agement actions to operate the company more efficiently. Or, positive variances
may have occurred because costs necessary for long-term performance—such as
maintenance of machinery, research and development, or advertising—were
deferred to achieve short-term gains.
Management must thoroughly investigate the causes for budget discrepan-
cies so that corrective action can be taken. Are markets as a whole performing
EXHIBIT 6.1 Comprehensive budgeting process.
Strategic planning
Market/SWOT analysisStrategic
developmentBudgetingImplementationControlEXHIBIT 6.2 Budget variance report.
Budgeted Actual Variance
Revenues $800,000 $780,000 $(20,000)U
Expenses (500,000) (470,00) 30,000 F
Profit 300,000 310,000 10,000 F