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Budgetary Control and Variances

Stage	Action
1	Set the budget — prepare targets for the period
2	Record actual results — collect actual costs and revenues
3	Calculate variances — compare actual to budget
4	Investigate causes — determine why variances arose
5	Take corrective action — adjust operations or revise the budget

A variance is the difference between the budgeted figure and the actual figure.

Variance type	Definition	Example
Favourable (F)	Actual is better than budget — actual costs lower or actual revenue higher	Actual sales £55 000; budget £50 000 → £5 000 F
Adverse (A)	Actual is worse than budget — actual costs higher or actual revenue lower	Actual wages £42 000; budget £38 000 → £4 000 A

Variance = Budgeted figure − Actual figure

When evaluating a variance, consider:

Size — is it material enough to investigate?
Cause — controllable (management decision) or uncontrollable (external factor)?
Trend — is it a one-off or recurring?
Interdependence — a favourable material price variance may cause an adverse usage variance (cheaper material may be lower quality)