What is a budget variance?

A budget variance is defined as the difference between the budgeted amount and the actual amount spent. This concept is crucial in financial management as it helps organizations assess their financial performance compared to the planned budget. By calculating the variance, leaders can identify whether they are under budget (negative variance) or over budget (positive variance) for particular areas of spending. Understanding where variances occur allows for more informed decision-making and financial planning in the future.

Tracking budget variances helps in evaluating the efficiency and effectiveness of resource use, and it can indicate areas where costs can be controlled or adjusted. For example, if a department consistently has a positive variance (spending less than allocated), resources can potentially be reallocated or the budget adjusted for future periods. This insight is essential for maintaining financial stability and meeting organizational goals.