Deviation analysis is a critical component of budget control that involves comparing actual financial performance against the planned or budgeted figures. This process helps identify variances, understand their causes, and take corrective actions to ensure financial objectives are met.

1. Variance: The difference between the budgeted amount and the actual amount.

   • Favorable Variance: When actual income is higher than budgeted or actual expenses are lower than budgeted.
   • Unfavorable Variance: When actual income is lower than budgeted or actual expenses are higher than budgeted.

2. Types of Variances:

   • Revenue Variance: Difference between actual and budgeted revenue.
   • Expense Variance: Difference between actual and budgeted expenses.
   • Profit Variance: Difference between actual and budgeted profit.

3. Variance Analysis: The process of analyzing variances to determine their causes and impacts.

1. Identify Variances:

   • Compare actual figures with budgeted figures.
   • Calculate the variance for each budget item.

2. Classify Variances:

   • Determine whether each variance is favorable or unfavorable.

3. Analyze Variances:

   • Investigate the reasons behind each variance.
   • Identify patterns or trends that may indicate underlying issues.

4. Report Findings:

   • Document the variances and their causes.
   • Communicate findings to relevant stakeholders.

5. Take Corrective Actions:

   • Develop and implement strategies to address unfavorable variances.
   • Adjust future budgets and plans based on the analysis.

Let's consider a simplified example of a company's budget for a specific month.

1. Revenue Variance: The actual revenue is $5,000 less than budgeted, indicating an unfavorable variance. Possible reasons could include lower sales, market conditions, or ineffective marketing strategies.

2. Salaries Variance: The actual salaries are $2,000 less than budgeted, indicating a favorable variance. This could be due to unfilled positions or lower-than-expected overtime.

3. Marketing Variance: The actual marketing expenses are $1,000 more than budgeted, indicating an unfavorable variance. This could be due to additional campaigns or higher advertising costs.

4. Utilities Variance: The actual utilities expenses are $200 less than budgeted, indicating a favorable variance. This could be due to energy-saving measures or lower usage.

5. Miscellaneous Variance: The actual miscellaneous expenses are $500 more than budgeted, indicating an unfavorable variance. This could be due to unexpected expenses or poor budgeting.

6. Total Profit Variance: The actual profit is $4,300 less than budgeted, indicating an unfavorable variance. This is primarily due to the lower revenue and higher marketing and miscellaneous expenses.

1. Revenue: Investigate the reasons for lower sales and develop strategies to boost revenue, such as new marketing campaigns or product promotions.

2. Marketing: Review the marketing budget and spending to identify areas for cost savings or more effective allocation of resources.

3. Miscellaneous: Analyze the unexpected expenses and improve the accuracy of future budgeting for miscellaneous items.

Given the following budgeted and actual figures for a department, calculate the variances and classify them as favorable or unfavorable. Then, provide a brief analysis of each variance.

1. Revenue Variance:

   • Variance: $95,000 - $100,000 = -$5,000 (Unfavorable)
   • Analysis: Revenue is lower than budgeted, possibly due to lower sales or market conditions.

2. Salaries Variance:

   • Variance: $42,000 - $40,000 = $2,000 (Unfavorable)
   • Analysis: Salaries are higher than budgeted, possibly due to overtime or additional hires.

3. Supplies Variance:

   • Variance: $8,500 - $10,000 = $1,500 (Favorable)
   • Analysis: Supplies cost less than budgeted, possibly due to bulk purchasing or cost-saving measures.

4. Travel Variance:

   • Variance: $6,500 - $5,000 = -$1,500 (Unfavorable)
   • Analysis: Travel expenses are higher than budgeted, possibly due to more trips or higher travel costs.

5. Total Profit Variance:

   • Variance: $38,000 - $45,000 = -$7,000 (Unfavorable)
   • Analysis: Profit is lower than budgeted, primarily due to lower revenue and higher salaries and travel expenses.

Deviation analysis is essential for effective budget control, allowing organizations to identify and address variances between budgeted and actual figures. By understanding the causes of variances and taking corrective actions, organizations can optimize their financial performance and achieve their economic objectives.