The phrase "budget vs. actual" is shorthand for budget to actual variance analysis. It refers to the process of comparing estimated results to actual results. Businesses study budget to actual to evaluate their performance, forecast future income and identify any operational centers that are performing differently than expected.
A budget to actual variance analysis or "budget vs. actual" is the process of comparing a business' budget to actual results, and figuring out the reasons for any variance.
A budget is a representation of the future revenues, expenses, cash flow and financial position that management expects to achieve for a certain time period such as a quarter or a year. Common types of budgets include a capital budget, an operating budget, a departmental budget and a master budget, which pulls all the separate budgets together in one document. Budget amounts are typically updated at least once a year after managers analyze a budget to actual report.
The difference between the budgeted amount for a figure and the actual result in the report is referred to as the budget variance. A budget variance can be displayed as a hard number or it can be put in a percentage format.
For example, say that a company budgeted sales of $500,000 but only made sales of $400,000. Since sales were $100,000 less than expected, the budget variance could be expressed as ($100,000). Or, you could express the percentage change of the actual figure by dividing the difference by the budgeted amount. In this example, the budget variance as a percentage is ($100,000) divided by $500,000 or (20 percent). This means that sales were 20 percent lower than expected. The dollar amount or the percentage amount of the budget variance – or both – are displayed on a Budget to Actual report.
When a company compares actual results to a single set of budgeted figures, it's measuring a static budget variance. A business can also compare actual results to a flexible budget. The values of a flexible budget changed based on the volume of production that a company experiences. Each budget line item is assigned an amount per unit, which is then multiplied by the number of units produced. For example, a company with a flexible budget may say that it expects to incur $5 of materials expense for every unit produced. If 1,000 units are produced during the accounting period, the flexible budget for materials is $5,000. If actual material cost were $4,000, the company would have a flexible budget variance of $1,000.
If a variance is significant, managers will talk with department staff and supervisors to uncover the reason for the budget variance. For example, if the materials expense variance was significant, a manager would probably contact the purchasing agent in charge of supplies. It's possible that there was a supply shortage and the purchasing agent was forced to purchase a more expensive alternative. Alternatively, if the purchasing agent was able to negotiate a contract with a vendor, he may have locked in a lower rate for materials. Whatever the cause, the manager will evaluate the reason for the variance and update the budget if he expects the variance to continue.