Calculate and interpret budget variances
Calculate favourable and adverse revenue or cost variances, investigate causes and avoid assuming the label alone shows performance.
Cambridge International AS & A Level Business 9609, 2026–2028 syllabus and 2029 syllabus, section 5.5.2. Cambridge states that both current versions have no significant changes affecting teaching. This lesson maps only its named section; other sections and full paper practice remain separate. Written practice is self-checked
Before you begin
- No previous business course is assumed. Use the lesson's definitions before applying them to the business context.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What is a favourable revenue variance in a simple comparison?
What you will learn
- Explain favourable and adverse variances
- Calculate revenue and cost variances
- Interpret causes and business consequences
A variance compares actual and budgeted results
A variance is the difference between an actual result and its budget. A revenue above budget is usually favourable because it may increase income; a cost above budget is usually adverse because it may reduce profit. State the basis and sign convention used.
For a simple calculation: revenue variance = actual revenue−budgeted revenue; cost variance can be stated as actual cost−budgeted cost with a positive amount adverse, or budgeted cost−actual cost with a positive amount favourable. Explain the convention to avoid sign confusion.
Interpret the cause before acting
A favourable sales variance may reflect higher volume or price, but it could come with extra costs or discounts elsewhere. An adverse cost variance could result from waste, higher input prices, more output or a one-off repair.
Compare against a flexible budget when activity changed, investigate causes and consider quality, customer service and long-term effects. A cost below budget is not automatically good if essential maintenance or training was skipped.
Pause and explain
Budgeted cost is $12,000 and actual cost is $13,500. Using actual−budget, what is the cost variance?
Worked example
Budgeted revenue is $100,000 and actual revenue is $108,000. Budgeted costs are $56,000 and actual costs are $61,000. Calculate and label the variances using revenue actual−budget and cost actual−budget.
Show the worked solution
- Revenue variance = 108,000−100,000.
- Cost variance = 61,000−56,000.
- More revenue is favourable; more cost is adverse under these conventions.
Answer Revenue variance is $8,000 favourable. Cost variance is $5,000 adverse. Together these changes improve profit by $3,000 relative to the original budget, before considering other variances.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Budgeted sales revenue is $72,000; actual is $68,500. Calculate the revenue variance using actual−budget and interpret it.
Give me a hint
Subtract the budgeted value from the actual value.
Compare my reasoning
- Calculate 68,500−72,000.
- Keep the negative sign or state the shortfall.
- Below-budget revenue is adverse, all else equal.
Revenue variance is −$3,500, or $3,500 adverse. Managers should investigate whether price, volume, timing or customer mix explains the shortfall.
Look for these in your work
- Difference is correct
- Sign or label is explicit
- Potential causes are identified
Budgeted costs are $25,000 and actual costs are $23,200. Calculate the cost variance using actual−budget and explain why it may not automatically be favourable.
Give me a hint
A negative actual-minus-budget cost difference means spending was lower, but investigate what changed.
Compare my reasoning
- Calculate 23,200−25,000.
- Actual cost is $1,800 below budget.
- Check whether savings came from efficiency or from harmful underspending.
Cost variance is −$1,800, meaning actual cost was $1,800 below budget and is usually favourable. It may be harmful if essential maintenance, quality checks or training were postponed, so managers should investigate the cause and outcomes.
Look for these in your work
- Difference is correct
- Convention is stated
- Quality or future risk is considered
Sales volume is 15% above budget and total costs are 12% above budget. Explain why managers should compare activity-adjusted performance before concluding costs were poorly controlled.
Give me a hint
Some costs may rise with output; use a flexible budget or cost driver.
Compare my reasoning
- More volume can increase variable cost totals.
- Adjust expected costs for the actual level of activity.
- Investigate the residual variance and any changes in mix or input prices.
Higher total cost may partly reflect the additional 15% output. Managers should compare actual cost with a flexible budget for actual activity, then investigate any remaining variance and consider product mix, input prices and efficiency before concluding control was poor.
Look for these in your work
- Volume relationship is explained
- Flexible comparison is proposed
- Residual causes are investigated
Common mistakes
- Reversing the sign convention without explaining it
- Calling every below-budget cost favourable
- Ignoring volume changes or service quality when interpreting a variance
What can you explain now?
What is a favourable revenue variance in a simple comparison?
Compare with the explanation
Actual revenue is above budget
Higher revenue may improve the result, subject to related costs and context.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How do you calculate favourable or adverse variances, and why should managers investigate causes before acting?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.