Variance is the difference between a revenue or cost item in the planning budget and the same item in the flexible budget at the actual level of activity.
Governments, businesses, or individuals may use budget variance on a regular basis to measure discrepancy between budgeted and actual numbers for a certain accounting category. An unfavorable budget variance indicates negative variance, indicating losses or shortages, while a favorable budget variance refers to positive variances or benefits.
Variance in the budget may be caused by both controlled and uncontrollable variables. Uncontrollable causes frequently come from events outside the firm. Because forecasters are imperfect at predicting future expenditures and revenues, budget deviations happen.
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