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7. What is a Variance?

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Transcript

Hello again, we are now going to begin our variance analysis section. The term variance is a common one, but I will explain what the variance is in the context of budget monitoring. A variance is the difference between the budget and the actual for a particular period. This could be a month, a quarter or a year. In fact, the way in which variances are calculated may differ in every organization. We will discuss this further in the next lecture.

The variance compares what has been planned with what has actually been achieved and relates to both income and expenditure. differences may be positive or negative. Establishing variances is the next step in the budget monitoring process and is a key another critical tool for understanding why a budget is not on target. currencies can be referred to in many different ways, positive or negative plus or minus, favorable or adverse, overspend or underspend. All these terms are interchangeable and relate to the same thing. That is which way the variances in comparison to the budget, over budget or under budget.

Variances are easy to calculate, and you only need to know how to add and subtract in order to perform a simple calculation. The above table shows a simple variance calculation. Each line refers to the same expenditure category. The first line compares a budget of 20 thousand, with an actual spend of 13,200, resulting in an overspend of 1200 or an adverse variance. The second line compares the same budget with an actual of 12,000. This calculates a zero variance, that is the actual spend is on target.

The final line shows an underspend of the budget by 800 which has been called a favorable variance. The mathematics is simple, but the interpretation can be far more complex. We will be considering this in depth in the lecture called reasons for variances. Here is a simple example. Get some paper and write down your answer. calculate the variance for each line and state whether or not it is positive or negative.

You may use any terminology You prefer we will go through this in the next lecture.

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