Lesson 3 - Statements and Budgets - Part 17

Budget Performance

If we do overspend or underspend in one category we have an Expense Variance. There are two types of Expense Variances, the first being a Favorable, meaning we spent less than what we Budgeted for and the other is Unfavorable, meaning we spent more than we Budgeted. This is a process that we should look at weekly or monthly to make sure we are still within the scope of the Monthly Budget.

In our Monthly Budget we had estimated that we would have a Food and Supplies expense of $250 for January. What happens if at the end of the month we spent $300? We would have an Unfavorable Variance of $-50, (Budget – Actual). We must think about why we spent $50 more than budgeted, was it because we splurged or because we needed to spend that much?

If we splurged on extra Food and Supplies that we did not need then we have to get rid of the Unfavorable Variance. We might have to cut our Food and Supplies Budget from $250 to $200 for the next month in order to get back in line. We could also cut back to $240 for the next 5 months.

If we needed to spend that much on Food and Supplies then we need to adjust our Master Budget and Monthly Budget to see if spending the extra amount will not hurt our Contribution to Savings. Otherwise we might need to cut back in another area of spending.