Budgets are statements setting out the planned performance of a business type in a table made up of numbers. Usually, these plans deal with money units (£’s/pence) but they can also consist of other measurable units e.g. units of output. Creating a budget enables actual figures to be termed a variance.
Variance is an important management tool because it enables businesses to manage their business – i.e. to take informed decisions based on management information (i.e. how actual performance compares with budgeted performance).eg; either favourable or unfavourable. A favourable variance is one where actual business performance proves to be better than what was budgeted for.
A variance is a difference between what actually happens and what is budgeted to happen. Arsenal Football Club has budgeted for the following gate receipts from its next three matches: You can see that there were positive variances for the match against Wolverhampton (£100,000). There was a disappointing negative variance for the cup match against Hull (-200,000), but the Manchester United game yielded the expected revenue.