How to Interpret Budget Variances

by Kirk Thomason; Updated September 26, 2017

Budgets represent internal reports that detail how a company spends capital. Managerial accounting activities often include the preparation of several different budget types and the calculation and interpretation of variances. Companies review variances to determine areas where the company is working well and not working well. The interpretation of budget variances is often a monthly process for managerial accountants. This process commonly falls under the flexible budget process, in which accountants compare actual expenses to the budgeted expenses.

Step 1

Gather the previously prepared budget and a copy of the cash disbursements journal.

Step 2

Compare the budget amounts for various expenditures to the actual capital spent in the cash disbursements journal.

Step 3

Determine if the variance is favorable or unfavorable. Favorable variances indicate a company spent less money than expected, whereas unfavorable variances indicate expenditures that are higher than expected.

Step 4

Review each variance to assess why the difference exists. Unfavorable variances may occur due to increased demand for goods, which requires more money spent to acquire materials and labor.

Step 5

Use a previous budget variance analysis to determine if a variance is occurring in each period. This may indicate that more money is necessary to complete a business process.

Tips

  • Creating a flexible or other budget type should occur on an annual basis. Variance analysis, however, can be a monthly accounting process.

References

  • "Accounting"; Charles T. Horngren, et al.; 2007

About the Author

Kirk Thomason began writing in 2011. In addition to years of corporate accounting experience, he teaches online accounting courses for two universities. Thomason holds a Bachelor and Master of Science in accounting.