Budget Variance Analysis

Variance analysis is used to compare differences between projected and actual amounts of income and expenses. It is used most often in working with the operating and cash flow budgets.

A budget variance is the difference between the amount forecast for an account in a budget and the actual amount spent or earned in the account.

Budget variances can be used in the following ways:

• Determine the causes of differences between actual and forecast amounts
• Revise budgets, goals, and plans
• Check on forecasting techniques used
• Evaluate and refine the information incorporated into budgets, especially for new buildings

Budget variances can be favorable or unfavorable.

• A favorable variance raises NOI.
• An unfavorable variance lowers NOI.

Favorable and unfavorable variances have different meanings depending on whether the variance is in income or expenses. If you project that the electric bill next month will be $2,100 and the actual bill is $2,450, the variance is $350, or 17% ($350/$2,100). Since the actual bill (expense) is $350 over what was forecast, the variance is unfavorable. It has decreased NOI.

If monthly rental income is projected at $104,000, and the actual figure for the month is $120,000, the variance of $16,000 or 15%, is favorable. The variance has increased NOI.

To determine the total variance, find the difference between the total unfavorable variances and the total favorable variances. This is called the net total variance.

Amount Projected	Annual Income Earned	Variance	Favorable/  Unfavorable
$40,000	$50,000	+25%	Favorable
Amount Projected	Amount Spent on Electric Bill	Variance	Favorable/ Unfavorable
$2,000	$3,000	-50%	Unfavorable