3.9.3 (HL)—Variances

A budget variance is the difference between an actual result and the budgeted result. For revenue or profit, a higher actual figure is favourable; for costs, a lower actual figure is favourable. The same arithmetic sign can therefore mean different things.

Suppose planned revenue is £120,000 and planned costs £80,000, but actual revenue is £135,000 and actual costs £101,000. Budgeted profit is £40,000; actual profit is £34,000, so the profit variance is £6,000 adverse. Higher sales did not prevent a weaker final result because costs rose more.

Investigate the mechanism before acting: a cost variance may reflect waste, an input-price shock or a deliberate quality improvement. An adverse sales variance may point to demand, pricing or promotion, while a favourable cost variance deserves a quality check rather than automatic praise.

‘Favourable’ does not mean ‘good in every respect’, and ‘adverse’ does not prove poor management. Variance analysis identifies a signal; the decision comes from its cause, materiality, trend and effect on the wider objective.