The budget process occurs annually for many companies and involves all departments. Each department reviews its activities and estimates its financial data for the following year. Some departments, such as the sales department or the customer financing department, estimate revenue amounts for the budget. All departments estimate their expenses. The budget coordinator works with all departments to ensure they meet their deadlines and finalize their numbers. Once each department completes its section, the budget coordinator compiles everything into one complete operating budget. Throughout the year, the budget coordinator creates budget reports. The budget reports compare actual revenues and expenses to the budgeted revenues and expenses. This difference represents a budget variance.
1. Determine actual revenues for the period. At the end of the period, verify that all revenue-generating activities appear in the financial records. Retrieve the balance of the actual revenues from the financial records. Contact the sales manager and ask him if any products shipped to customers that were not recorded in the financial records. Add these transactions to the recorded revenues to determine the total revenue earned during the period.
2. Locate the budget revenues. Review the operating budget and find the total sales.
3. Calculate the revenue variance. Subtract the budget revenue from the actual revenue. This determines the revenue variance.
4. Determine actual expenses for the period. At the end of the period, verify that all expenses appear in the financial records. Retrieve the balances of the actual expenses for each department from the financial records. Contact each department manager and ask if any expenses need to be recorded in the financial records. Add these transactions to the recorded expenses to determine the total expenses incurred during the period.
5. Locate each department's budget expenses. Review the operating budget and find the total expenses for each department.
6. Calculate the expense variance by department. Subtract the budget expenses by department from the actual expenses by department. This determines the expense variance for each department.
- Variances only provide value if the company holds managers accountable. Meet with each manager to review the budget variance for their department. Ask them to explain why the variance occurred and how they plan to address the variance.
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