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Budget Variance Formula
Variance = Actual - Budget
Variance % = (Actual - Budget) / |Budget| × 100
Favorable vs Unfavorable
The direction that makes a variance "favorable" depends on the line item type:
| Line Type | Favorable Condition |
|---|---|
| Revenue | Actual > Budget (earned more than planned) |
| Expense | Actual < Budget (spent less than planned) |
Materiality Thresholds
Most organizations set materiality thresholds for variance investigation. Common rules: - Investigate variances > 5–10% for budget lines over $10k - Always investigate revenue variances > 10% - Flag cumulative variances even if individual periods are within tolerance
Types of Budget Variance
- Price variance: The unit price differed from what was budgeted
- Volume variance: Quantity sold or units consumed differed
- Efficiency variance: Labor or material usage per unit differed
- Mix variance: The combination of products/services sold differed from the planned mix
Understanding the source of a variance determines the appropriate corrective action.