}Budgetary control is achieved by comparing the actual results with the budget. The differences are calculated as variances and management action may be taken to investigate and correct the variances if necessary or appropriate.

}If costs are higher or revenues are lowerthan the budget, then the difference is an adverse variance.

}If costs are lower or revenues are higherthan the budget, then the difference is a favourablevariance.

Example 2

}A company planned to produce and sell1,000 units and had a direct material budget of $5,000 but they only producedand sold 900 units with a direct material cost of $4,800.

}It looks like the company has spent lesson material than it had budgeted

}However, this is not comparing like withlike, the actual cost must be compared to the flexed budget.

}Budgeted material cost per unit =$5,000/1,000 = $5 per unit

}Total flexed budget material cost = $5 ×900 = $4,500

}The difference between the actual and theflexed budget is known as the budget variance.