Budgets and Variance Analysis (HL)

A, budget, is, a, financial, plan, for, the, future., It, outlines, what, the, business, expects, to, earn, and, what, it, plans, to, spend., It, serves, multiple, purposes., It, allocates, resources,, sets, targets,, coordinates, departments,, and, acts, as, the, standard, for, measuring, performance, later, on.

Variance, analysis, looks, at, the, difference, between, the, budgeted, figure, and, the, actual, outcome., A, favourable, variance, boosts, profit, compared, to, the, budget., This, happens, when, revenue, is, higher, than, expected, or, costs, are, lower., An, adverse, variance, (or, unfavourable, variance), does, the, opposite:, revenue, is, lower,, or, costs, are, higher.

The, tricky, word, is, “favourable.”, It, depends, on, the, effect, on, profit,, not, just, whether, the, number, increased., If, costs, come, in, below, budget,, that’s, favourable., If, revenue, comes, in, below, budget,, that’s, adverse., Both, may, be, "lower, than, budgeted,", but, they, lead, to, different, outcomes., Always, ask, how, the, difference, affected, profit.

A, variance, is, a, signal, to, dig, deeper,, not, a, final, judgment., An, adverse, cost, variance, could, indicate, poor, control., Or, maybe, the, budget, was, unrealistic,, or, input, prices, changed, for, reasons, beyond, the, firm's, control., On, the, flip, side,, a, favourable, variance, might, hide, issues., For, example,, a, large, favourable, maintenance, variance, could, mean, necessary, maintenance, was, skipped,, leading, to, a, bigger, adverse, variance, later, on.

There, are, two, main, approaches, to, setting, budgets., Incremental, budgeting, starts, with, last, year's, figures, and, makes, adjustments., It’s, quick, and, stable, but, can, keep, spending, that, no, longer, makes, sense., Zero-based, budgeting, requires, every, item, to, be, justified, from, scratch, each, cycle., This, method, is, much, more, thorough, and, takes, significantly, more, time,, which, is, why, many, organizations, use, it, selectively, rather, than, for, everything.