What does budget variance measure?

Budget variance measures the difference between planned and actual financial performance. This metric is essential for organizations as it allows them to assess how well they stick to their financial plans. When a variance occurs, whether favorable or unfavorable, it highlights the areas where the actual performance deviates from expectations.

A favorable variance indicates that the actual results exceed the budgeted figures, suggesting effective cost management or higher-than-expected revenues. Conversely, an unfavorable variance points to a shortfall, prompting a review of performance and strategy to understand the underlying causes. This analysis is crucial for effective financial management and decision-making within an organization.

While the other options may relate to financial performance, they do not specifically capture the comprehensive nature of budget variance. For example, the first option focuses primarily on income and expenses without encompassing overall financial performance. The third option addresses revenue and costs but does not consider the planning aspect, and the fourth option looks at profit margins rather than a comparison of planned versus actual figures. Thus, measuring budget variance is fundamentally about evaluating the differences between what was expected and what actually occurred.