What does budget variance measure?

Budget variance measures the difference between estimated and actual costs. This metric is crucial for organizations, as it helps assess how well a company is adhering to its financial plan. When a business creates a budget, it outlines expected revenues and expenses based on forecasts. Once the period concludes, actual figures are compared against these estimates.

Understanding budget variance allows management to identify areas where they may have overspent or underspent compared to their expectations. This insight is essential for making informed decisions about adjusting operational strategies, allocating resources more effectively, and improving future budgeting processes. A favorable variance indicates better performance than expected, while an unfavorable variance suggests the need for closer examination and potential corrective action.

While other options may relate to financial analysis, they do not specifically capture the essence of budget variance, which focuses exclusively on the comparison of projected versus actual figures.