There are four common reasons why actual expenditure or income will show a variance against the budget.
1. The cost is more (or less) than budgeted
Budgets are prepared in advance and can only ever estimate income and expenditure. There are usually two reasons why cost varies from budget.
- Price - item costs more or less than expected.
- Volume - we buy more or less of items than expected.
We generally try and allow for likely changes in price such as inflation, but budgets will never be 100% accurate.
2. Planned activity did not occur when expected.
When preparing a budget you have to decide when the activity will take place. If it happens at a different time from planned you will get a temporary variance which will generally resolve itself without action on your part. This type of variance is known as a timing variance.
The only occasion when you may need to act on a timing variance is at year end. To reduce the occurrences of timing variances consideration should be given to how the budget is phased. For more information on this please refer to Budget phasing.
It is not always possible to predict with certainty the date activities will take place and often these are beyond the control of a budget holder.
For example, a delivery of consumables may be delayed due to lack of stock at the wholesaler or delays with the recruitment process may delay the appointment of a new staff member.
3. Change in planned activity
The other main cause of variances is that the planned activity changes.
- Planned activity does not occur e.g. a new staff member's appointment is put on hold indefinitely.
- Unplanned activity occurs, for example a staff member may fall ill for an extended period requiring the recruitment of temporary cover at additional cost.
The wrong combination of codes e.g. the wrong source of funds, keying error at the payroll/invoice input stage or failure to make an adjustment in GL could all lead to an unexpected variance.