Variances - Illustrated Example

Let's look at an example of how budget variances are calculated.

Consider the budget statement above.

What do the numbers in the budget statement tell us?

Looking at the sales revenue section, you can see that actual sales of standard product were £15k higher than budget – this is a positive (favourable) variance.

Turning to the costs section, actual wages were £3k higher than budget – i.e. an adverse (negative) variance.

Overall, the profit variance was positive (favourable) – i.e. better than budget