BUDGET VARIANCE Meaning and
Definition
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Budget variance refers to the difference between the planned or expected expenditure and the actual expenditure within a specified period of time. It is a financial performance metric used by organizations to assess their budgetary control and management efficiency. Budget variance measures the extent to which the actual costs deviate from the projected costs, highlighting the discrepancies between planned and actual financial outcomes.
There are two types of budget variances: favorable and unfavorable. A favorable budget variance occurs when the actual costs are lower than the planned costs, resulting in savings or higher profits. On the other hand, an unfavorable budget variance indicates that the actual costs exceed the planned costs, leading to losses or lower profitability.
Budget variance analysis allows organizations to identify the reasons behind the deviations and take necessary corrective actions. It helps in evaluating the effectiveness of budget planning, resource allocation, and cost management strategies. By analyzing budget variances, companies can identify areas where they are over or under spending, enabling them to make informed decisions for future budgeting cycles.
Budget variances can arise due to various factors such as unforeseen changes in market conditions, fluctuations in raw material prices, changes in customer demand, inaccurate forecasting, or improper financial management. Therefore, it is crucial for organizations to regularly monitor and analyze budget variances to ensure effective financial control and efficiency in resource allocation.
Etymology of BUDGET VARIANCE
The etymology of the word "budget variance" can be broken down as follows:
1. Budget: The term "budget" originated from the Latin word "bulga" meaning "bag" or "purse". In the medieval period, "budget" referred to a bag or pouch that held money or resources allocated for specific purposes. Over time, it acquired the meaning of a financial plan or estimate of income and expenses.
2. Variance: The term "variance" comes from the Latin word "varius" meaning "diverse" or "varying". In finance and statistics, "variance" refers to the difference or deviation between actual and planned or expected values. It represents the extent of deviation from the budgeted amount.
Therefore, the term "budget variance" emerged to describe the difference or deviation between the planned or budgeted amount and the actual amount spent or earned in financial matters.
