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Exhibit 11.2 Budget variance report.
Control Phase of Budgeting
The first and most time-consuming phase of budgeting is the planning process. The control phase of
budgeting, however, may be when firms get the most value from their budgeting activities. Exhibit
11.2 is a budget-performance report for first quarter of the year. The difference between the budgeted
amount and the actual amount is called a budget variance. Budget variances are reported for both
revenues and costs separately. In this case, revenues were $20,000 under budget and are, therefore,
considered as an unfavorable budget variance (U). Expenses, however, were $30,000 less than
expected, a favorable budget variance (F). The net result is a favorable profit budget variance of
$10,000.
Each category is then separately analyzed to uncover the source of the variance. Although revenues
in total are lower than expected, management is interested in the actual product lines causing this
variance. Further analysis might reveal, for example, that all of the product lines are performing
satisfactorily except for one that is performing more poorly than expected. On the expense side, a
favorable budget variance may be due to positive effects of management‟s actions to operate the
company more efficiently; or, positive variances may be due to the reduction of costs necessary for
long-term performance to achieve short-term gains, such as a reduction in maintenance of machinery,
research and development, advertising, and so forth.
Management must thoroughly investigate the causes for budget discrepancies so that corrective
action can be taken. Are markets as a whole performing better or worse than expected? Is the
company‟s marketing support adequate? Has the competitive landscape changed? Are cost variances
the result of management‟s actions in response to competitive pressures or rather due to inadequate
control? The answers to these questions may suggest changes in the company‟s strategic and tactical
plans to compensate for the variances.