What does a budget variance represent?

A budget variance represents the difference between what was planned in a budget and what actually occurred in terms of financial performance. When an organization budgets, it sets expectations for income, expenses, and overall financial health based on various factors and assumptions. The variance highlights any discrepancies—either favorable or unfavorable—between the budgeted figures and actual outcomes.

For instance, if a company anticipated expenses of $100,000 but only incurred $90,000, the variance would be $10,000 favorable because it spent less than planned. Conversely, if the company overshot expenses at $110,000, the variance would be $10,000 unfavorable, indicating that costs exceeded the budget. This analysis is crucial for management as it provides insights into performance, helping to identify areas for improvement and aiding in future budgeting processes.

The other options represent specific financial concepts but do not encompass the broader definition and implications of a budget variance. While the first option focuses solely on sales, the third discusses cost calculations, and the fourth relates to net income, they do not capture the comprehensive nature of budget variances as a measure of performance against the overall financial plan.