What are the common causes of budget variance?

Budget variance is the term applied to a business situation when the amount spent is greater than the budget reserved for the expense. For example, if a company has a budget of $1,000 (USD) for two new computers, but the new computers cost $1,200, there will be a budget variance of $200. There are a number of common causes for the variance in budget, including poor budgeting, poor logistical planning, and increased product costs.

Budget variance can be divided into several categories. This includes material variation, job variation and sales variation. Identifying the causes of each variance is useful because it helps individuals, companies, and organizations better prepare their next budget.

The material variation refers to the cost of the products. Using the computer example above, the computers may have been advertised in a catalog or online for $500 each. If the computers cost $600 when purchased, there will be a variance.

All kinds of products, from food to office supplies, can increase or decrease the cost. This is especially the case if natural disasters affect food prices or if the product, such as gasoline, is dependent on oil prices. The introduction of new taxes or increases in old ones will also have an adverse effect on the budget.

Work variation involves the cost and contribution of employees to the business or organization. Most companies will have a total salary budget. Likewise, a family will budget according to an expected number of people working an expected amount. Any unpaid leave or loss of work will negatively affect the budget. If a company employs a lot of people or if the productivity of its employees decreases, its cost will cause a variance in the budget.

Staff productivity partially affects sales variance. Most companies will set a target for the sales necessary for the company to break even. If sales fall below that budget, the cost of keeping the business running is greater than the revenue generated. As with material variation, sales variation can be attributed to poor performance or bad luck.

For example, an ice cream vendor is likely to suffer if there is a cold summer, because predicted sales will decline. Likewise, a store that poorly organizes its products and employees is also likely to see reduced sales and budget variance. The ice cream vendor can't do much to increase sales in cold weather, but the store should be more organized.

There are several reasons for a budget variance, and these reasons are often divided into uncontrollable and controllable variances. Oil prices are often difficult to predict, making them quite unmanageable, but tax increases are usually announced well in advance and can be calculated into a budget with decent accuracy. A well-prepared budget should account for variance when budgeting to spend less than the amount of money that is expected to be available. Any extra money can be stored in a contingency fund.

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