In budgeting, what does the term "variance" refer to?

In budgeting, the term "variance" specifically refers to the difference between budgeted and actual performance. Variance analysis is a key component of budgetary control, allowing organizations to assess how well they are adhering to their financial plans. By examining variances, managers can identify areas where actual performance deviates from what was anticipated, whether this be in terms of revenues, costs, or other financial metrics.

When a budget is created, it sets expectations for financial performance based on estimates and forecasts. After the period ends, actual results are collected, and any discrepancies between the two are labeled variances. These variances can be favorable or unfavorable: a favorable variance occurs when actual performance exceeds budgeted expectations, while an unfavorable variance arises when actual performance falls short. Understanding these variances enables management to make informed decisions regarding spending, resource allocation, and strategic planning, ensuring that the company remains aligned with its financial goals.