What causes variances between actual and budgeted figures?

Variances between actual and budgeted figures are caused by unexpected changes in costs, revenues, or business conditions.

In more detail, budgeting is a financial plan that estimates revenues and expenses over a specific period. It is based on assumptions and predictions about future business conditions. However, these assumptions may not always hold true, leading to variances between the actual and budgeted figures.

One of the main causes of these variances is unexpected changes in costs. For example, a business might have budgeted for a certain cost of raw materials, but due to unforeseen circumstances such as supply chain disruptions or changes in commodity prices, the actual cost might be higher or lower than budgeted. Similarly, labour costs might vary due to changes in wage rates, overtime, or productivity levels.

Another major cause of variances is changes in revenues. A business might have predicted a certain level of sales based on market research and past trends, but actual sales might be different due to factors such as changes in customer demand, competition, or market conditions. For instance, a sudden economic downturn could lead to lower than expected sales, while a successful marketing campaign could result in higher than expected sales.

Changes in business conditions can also lead to variances. These could include changes in government policies or regulations, technological advancements, or environmental factors. For example, a new tax or regulation could increase costs, while a technological innovation could reduce costs or increase revenues.

In addition, there could be variances due to errors or inaccuracies in the budgeting process itself. For instance, there could be mistakes in the data used for budgeting, or the assumptions made might be unrealistic or overly optimistic.

In conclusion, variances between actual and budgeted figures are a common occurrence in business and can be caused by a variety of factors. Understanding these causes can help businesses to improve their budgeting process and manage their finances more effectively.