Budget Variance is a key measurement used by businesses and organizations to analyze the effectiveness of their financial planning. This term is used to describe any discrepancies between actual results and the original assumptions set with a budget, and can be measured in both units and financial value. A variance can be either favorable or unfavorable and occurs when the amount, cost, or quantity of something differs from the budgeted or expected amount.

When there is an unfavorable budget variance, it indicates that the resources used exceeded the amount planned and the project has either gone over budget or has not been completed within the allotted time period. Unfavorable budget variances are often associated with unexpected costs, misspent resources, or an inefficient use of a budget. This type of variance is an early warning sign for budgeting problems, and it requires attention from upper management in order to adjust the budget and bring it back in line with expectations.

On the other hand, favorable budget variances generally occur when the actual results exceed the budgeted amounts. This means the project was completed with less resources than anticipated, therefore the budget was allocated correctly, and the savings are passed on to the company or organization. Favorable variances can also be attributed to efficient use of resources, luck, or more optimal conditions than expected.

There are numerous reasons why budget variances can occur, and can be either internal or external. Internal budget variances are usually related to poor budgeting, wrong expectations created by the budget, or incorrect estimations of resources before finalizing the budget. External factors that can cause budget variances include unexpected price changes of goods or services, changing business conditions, or a change in laws or regulations that affects the budget. The importance of budget variance analysis should not be overlooked, as it provides the opportunity to adjust and fine-tune the financial plan going forward.