Here’s a clear explanation of Budget, Budgetary Control, and Variance — key concepts in
business management and accounting:
1. Budget
A budget is a financial plan that estimates future income and expenses over a specific
period, usually a year. It helps an organization plan its operations and allocate resources
efficiently.
●​ Purpose: To set targets for revenues, costs, and profits.
●​ Types: Operating budgets, cash budgets, capital budgets, sales budgets, etc.
●​ Use: Helps managers anticipate financial needs and control spending.
2. Budgetary Control
Budgetary control is the process of comparing actual financial performance against the
budgeted figures to monitor and control an organization's activities.
●​ It involves:
○​ Preparing budgets.
○​ Measuring actual results.
○​ Identifying differences.
○​ Taking corrective action to align performance with the plan.
●​ Purpose: To ensure efficient use of resources and achieve organizational goals.
●​ It helps managers detect problems early and make adjustments.
3. Variance
A variance is the difference between the budgeted amount and the actual amount
spent or earned.
●​ Types of Variance:
○​ Favorable Variance: When actual income is higher than budgeted, or actual
expenses are lower than budgeted (good).
○​ Adverse (Unfavorable) Variance: When actual income is lower than
budgeted, or actual expenses are higher than budgeted (bad).
●​ Use: Variance analysis helps management understand why there are differences and
how to improve future planning and control.
Summary Table
Term
Meaning
Purpose
Budget
Financial plan estimating
future income and
expenses.
Planning and resource
allocation.
Budgetary Control
Monitoring and controlling
performance against the
budget.
Ensuring goals are met and
efficient use of resources.
Variance
Difference between
budgeted and actual figures.
Identifying deviations to take
corrective actions.