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What is budget variance analysis? What is a flexible budget?
A variance (difference between actual and forecast figures) is a signal to management that revenues or spending did not go according to plan. If the variance represents overspending, moreover, it is an indicator that there may be problems paying future expenses. Variance analysis attempts to find the reasons that actual figures were over or under forecast so that either
 Corrective action can be taken to reduce variances in the future, (an exercise in static budgeting) or
 Figures for future spending can be adjusted as necessary (the practice of flexible budgeting).
Confusion sometimes arises in variance analysis because two different conventions for calculations commonly used.
 Convention 1:

Incoming revenue variance = Actual – Forecast
Expense spending variance = Actual – Forecast

This convention is used in this encyclopedia and in many organizations. Under this approach, a positive variance always means the actual result was greater than the budgeted amount.
 Convention 2:
Some organizations (such as the Project Management Institute), however, recommend using the above convention for revenue, but reversing the order for expense items:

Incoming revenue variance = Actual – Forecast
Expense spending variance = Forecast – Actual

Under this convention, positive variances are always "good things" (more revenue or less spending than expected), and negative variances are always "bad things."
Obviously, anyone involved in planning and analyzing spending needs to ascertain which convention is used locally.
In many companies, variance analysis is often an especially important issue in planning for two areas: (1) Direct and indirect manufacturing costs, and (2) sales revenues and sales costs. Revenues and costs in these areas are often difficult to predict accurately. Variance

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