A budget is a useful tool, but actual expenses and income often turn out quite differently from the plan. Businesses, other institutions and even families use budgets to project revenue and expenditures over a certain period of time. A budget helps managers plan goals, measure progress and adjust for changes. A positive expense variance means that an actual expense differs from the amount in the budget.
An expense or expenditure variance is the difference between a budgeted expense and the actual amount. The variance is positive or negative, depending on whether an expense is less or more than budgeted. For example, if a company budgets $10,000 for an expense and spends $8,000, subtract $8,000 from $10,000. The difference is a surplus of $2,000, or a positive expense variance. If a company budgets $8,000 and spends $10,000, subtract $10,000 from $8,000. The result is -$2,000, a negative expense variance or cost overrun.
Depending on their accounting systems, companies break down expenses in various ways. One level may show a positive expense variance that disappears at another level. For example, a company has a $10,000 advertising budget and plans $5,000 to advertise boots and $5,000 to advertise athletic shoes. However, it actually spends $3,000 advertising boots and $7,000 advertising athletic shoes. It has a $2,000 positive expense variance for boots and a $2,000 negative expense variance for shoes. These two variances cancel each other out at a higher level, and shoe advertising overall is on budget.
Advantages and Disadvantages
A positive expense variance is normally good news. Just as in the family budget, money saved can go to other expenses or create a surplus for future goals. In some cases, however, saving on expenses can hurt income. Money not spent on advertising, for example, may contribute to disappointing sales figures for the year. If sales revenues are less than expected, profits can fall even with lower expenses. Similarly, skimping on research and development can cause a company to lose market share to competitors who develop better products.
Using Expense Data
Data on positive and negative expense variance helps management measure and improve performance. The University of Colorado, for example, prepares its revenue and expense reports monthly. It asks managers to compare actual expenses to the budget at least quarterly and make spending adjustments as necessary. Managers also compare current and previous year's budgets to check whether planned expansions or contractions are taking place. In addition, managers can examine whether a specific positive expense variance came by accident or design. They can determine whether or not the organization got the desired result even with the cost savings.
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