Budget variance occurs when spending exceeds the allocated budget. It can be caused by poor budgeting, logistics planning, or increased product costs. Variance can be categorized into material, labor, and sales. Uncontrollable and controllable variances should be accounted for in a well-prepared budget.
Budget variance is the term applied to a business situation when the amount spent is greater than the budget set aside for spending. For example, if a company budgets $1,000 US dollars (USD) for two new computers but the new computers cost $1,200 USD, then there is a budget variance of $200 USD. There are a number of common causes for budget variance, including poor budgeting, poor logistics planning, and increased product costs.
Budget variance can be divided into several categories. These include material variance, labor variance, and sales variance. Identifying the causes of each variation is useful because it helps individuals, companies, and organizations to better prepare their next budget.
Material variance refers to the cost of products. Using the computer example above, the computers may have been advertised in a catalog or online for $500 USD each. If the computers cost $600 USD when actually purchased, there will be a variance.
All kinds of products, from food to office supplies, can increase or decrease the cost. This is especially the case if natural disasters affect food prices or if the commodity, such as gasoline, is dependent on oil prices. The introduction of new taxes or increases in old ones will also have an adverse effect on the budget.
Job variance involves the cost and contribution of employees to the business or organization. Most companies will have a total salary budget. Similarly, a household will budget in line with an expected number of people working an expected amount. Any unpaid leave or loss of work will negatively affect the budget. If a company employs too many people or the productivity of its employees decreases, its cost will cause a variance in the budget.
Staff productivity partly affects sales variance. Most companies will set a target for the sales required for the company to break even. If sales fall below this budget, then the cost of keeping the business running is greater than the revenue it generates. As with material variance, sales variance can be attributed to poor performance or bad luck.
For example, an ice cream vendor is likely to suffer if there is a cold summer, because advance sales will decline. Similarly, a store that misorganizes its products and staff is also likely to see reduced sales and a variance in budget. The ice cream vendor can’t do much to increase sales in cold weather, but the store should have been better organized.
There are multiple reasons for a budget variance, and these reasons are often divided into uncontrollable and controllable variances. Oil prices are often hard to predict, making them quite uncontrollable, but tax increases are often announced well in advance and can be calculated on a budget with decent accuracy. A well-prepared budget should account for variance when budgeting to spend less than the amount of money expected to be available. Any extra money can be stored in a contingency fund.
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