Simplest Measure of Performance

The simplest measure of performance is the variance, or difference, between actual income

and budgeted income. Bayou’s profi t variance, for example, is $75,500. That is the actual

profi t of $114,500 less the budgeted profi t of $190,000. Because actual income was less

than budgeted income, this is typically referred to as an unfavorable variance . For evaluation

purposes, we could stop here and say that Bayou’s performance did not meet expectations

because actual income was less than budgeted. However, this does not provide much

information about the causes of its actual performance. We want to look more closely at

the information available and try to use it to obtain more insight into operations.

See Exhibit 16.1 for Bayou Division’s actual income statement and the master budget

for August. The master budget represents the fi nancial plan for Bayou for the month and

the actual results refl ect the performance.

Before we analyze the variances in more detail, it is important to understand what the

labels “favorable” and “unfavorable” mean. Traditionally, they are used to indicate how

actual income differs from budgeted income. A favorable variance increases operating

profi ts, holding all other things constant. An unfavorable variance decreases operating

profi ts, holding all other things constant. Thus, when discussing revenue, income, or contribution

margin,

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