What is the main purpose of a variance report in budgeting?

The main purpose of a variance report in budgeting is to compare budgeted amounts to actual figures. This report highlights the differences (variances) between what was planned or budgeted and what was actually spent or earned during a specific period. By identifying these variances, organizations can gain insights into their financial performance, understand the reasons behind discrepancies, and make informed decisions to address any issues.

For instance, if the actual expenses exceed the budget, the organization can investigate the causes, such as overspending in particular areas, and take corrective actions if necessary. Conversely, if there is a surplus, the organization can decide on reallocation or savings for future use. Variance reports are critical tools for financial management as they aid in evaluating the effectiveness of budgeting practices and overall financial health.