5.5.2—Variances

A variance is the difference between budgeted and actual performance. A favourable variance is not always good and an adverse variance is not always bad; interpretation depends on the cause and objective.

Price, volume, efficiency, timing, one-off events and unrealistic assumptions can all create variance. Managers should focus attention on material, controllable and decision-relevant causes.

Lower labour cost may reflect efficiency—or understaffing that reduces quality. Higher material cost may follow a deliberate quality upgrade.

Blaming a department from the number alone ignores causation, interdependence and the quality of the original budget.