Organizations use budgets to reach their financial goals. A planning budget is a detailed financial plan that shows future income and expenses. For example, all of us sometimes create household budgets that plan projected income and expenses for food, clothing, housing, etc. At the end of the budgeting period, we compare what we earned and our expenses to the planning budget to make sure we followed the plan. For example, if we buy a boat and didnt budget for that boat, what might happen? Organizations use budgets in a similar way.

We also create flexible budgets to help guide actual operations. For example, an organizations actual expenses will rarely equal its budgeted expenses as estimated. Activities, such as sales, are rarely the same as budgeted. Many actual expenses and revenues will naturally differ from what was budgeted. A flexible budget is an estimate of what revenues and costs should have been, given the actual level of activity for the period. A flexible budget might help us to justify buying that boat!

Variance analysis evaluates and improves performance. A varianceis the difference between the actual amount and the amount budgeted in a certain time period. In other words, the amounts are different. Revenue variance is the difference between actual revenue and budgeted revenue. If the actual revenue is higher than budgeted revenue, the variance is labeled favorable. If actual revenue is less than budgeted, the variance is labeled unfavorable. Spending variances also occur. If the actual spending exceeds budgeted spending, the variance is unfavorable. If the actual spending is less than budgeted spending, the variance is favorable. As you can see, earning more than budgeted is good, but we should try to avoid spending more than what we budget. Think about the boat!

• Describe the budgeting process at your place of work. If you do not work or if this information is not available, you may describe the budgeting process you use in your personal life.
• Explain how using a flexible budget and variance analysis can help make the process you described above more effective.