It is common for companies and organizations to develop standard costs for their services and goods in order to then prepare their annual budgets and estimate revenue. The difference between the actual and budgeted revenue is known as the revenue variance, and this concept is rather essential for companies. The purpose of this paper is to explain the significance of revenue variance in detail and talk about its two different types.
To begin with, if the actual revenue exceeds the budgeted one, then the variance is considered favorable. In case the company does not manage to make its actual income higher, then the variance is unfavorable (Basu, n.d.). While many companies prefer to identify and analyze both variances, some organizations decide that defining the unfavorable one is more important. Nevertheless, it is vital to pay attention to both of these types due to several reasons. First of all, the proper identification and use of variances can help the company achieve its short- and long-term goals (Basu, n.d.). For example, if there is a favorable variance, the company may analyze its causes and factors and find a way to increase its monthly and annual revenue. At the same time, managers should also check whether unfavorable variances can affect the organization’s objectives and current strategies.
Further, variances analysis also allows organizations to avoid numerous problems or solve them early to prevent complications. For instance, if a business spends $800 on marketing and has favorable revenue of $300, identifying this variance may help the company understand that it is actually losing its profit. Finally, finding the root cause of unfavorable variance can lead to eliminating the issue and the company’s growth (Basu, n.d.). Thus, both favorable and unfavorable variances are essential for the company’s budget planning and successful accomplishment of objectives.
Reference
Basu, S. (n.d.). The importance of revenue variances. Chron. Web.