Obtaining a favorable variance (or, for that matter, an unfavorable variance) does not necessarily mean much, since it is based upon a budgeted or standard amount that may not be an indicator of good performance. A favorable variance either indicates that revenues were higher than expected, or that expenses were lower than expected. Conversely, an unfavorable variance either indicates that revenues were lower than expected, or that expenses were higher than expected. Managers tend to investigate unfavorable variances in much more detail than favorable ones, on the grounds that these variances must be corrected in order to achieve an organization’s budgeted results. If a company had budgeted its revenues to be $200,000 and the actual revenues end up being $208,000, the company will have a favorable variance of $8,000. The variance is favorable because having the actual revenues being more than the amount budgeted is good for the company’s profits.

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1. Either may be good or bad, as these variances are based on a budgeted amount.
2. For example, if a company’s budget for supplies expense is $30,000 and the actual amount is $28,000 or $34,000, there will be a variance of $2,000 or $4,000 respectively.
3. Management should only pay attention to those that are unusual or particularly significant.
4. The business has only been running for about six months but has proven popular internationally because of the customization process and the good quality fabric you use.
5. The company would look at the sales mix variance for each product or product line to help identify problems.

The same column method can also be applied to variable overhead costs. It is similar to babyquest foundation the labor format because the variable overhead is applied based on labor hours in this example. Let’s say your custom blankets are made of a rich acrylic and polyester blend that keeps the blanket soft for years. You buy in bulk but after three months, the price dramatically increases, something you had not counted on.

You had budgeted for materials, labor and manufacturing supplies at the outset. If the number of classes had remained at 500, and we still saw the increase in wages, there would be more cause for concern., right? But, what if the wages had gone up, more than the increase in revenue? Each favorable and unfavorable variance needs to be examined individually, as noted in the popcorn example in the video! Analysis is the key to making sure that increases (favorable variances) in revenue or increases (unfavorable variances) in expenses are appropriate.

Favorable versus Unfavorable Variances

Perhaps sales have been suffering lately and your product is piling up and you need a new plan. Undertaking a variance analysis and understanding how you got the result you did will allow you to budget and strategize more effectively for the future. A favorable variance indicates that a business has either generated more revenue than expected or incurred fewer expenses than expected. For an expense, this is the excess of a standard or budgeted amount over the actual amount incurred. When revenue is involved, a favorable variance is when the actual revenue recognized is greater than the standard or budgeted amount.

Types of Variances

As a result you are spending more than expected on materials, and this price variance is costing you. Now when you look at your financial statements you see an unfavorable variance. A favorable variance occurs when the cost to produce something is less than the budgeted cost. It means a business is making more profit than originally anticipated. Favorable variances could be the result of increased efficiencies in manufacturing, cheaper material costs, or increased sales.

A favorable variance is when the actual performance of the company is better than the projected or budgeted performance. As mentioned above, materials, labor, and variable overhead consist of price and quantity/efficiency variances. Fixed overhead, however, includes a volume variance and a budget variance. Variance analysis can be summarized as an analysis of the difference between planned and actual numbers.

Then, management will be tasked to see if it can remedy the situation. The definition of material is subjective and different depending on the company and relative size of the variance. However, if a material variance persists over an extended period of time, management likely needs to evaluate its budgeting process. Management should only pay attention to those that are unusual or particularly significant. Often, by analyzing these variances, companies are able to use the information to identify a problem so that it can be fixed or simply to improve overall company performance. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers.

When considering the reasons behind a favorable or unfavorable budget variance, one must also consider if the variances were actually controllable or not. If the variance was ‘controllable’, it means the costs incurred were originally within management’s ability to control. This may be the hourly rate paid to staff, or incentives for the sales team. If it’s ‘uncontrollable’, then these are factors that are outside of management’s control, such as the cost of materials. For example, let’s assume you run a business that makes customizable handmade blankets. The business has only been running for about six months but has proven popular internationally because of the customization process and the good quality fabric you use.

Conversely, an unfavorable variance occurs when revenue falls short of the budgeted amount or expenses are higher than predicted. As a result of the variance, net income may be below what management originally expected. A budget variance is a periodic measure used by governments, corporations, or individuals to quantify the difference between budgeted and actual figures for a particular accounting category. A favorable budget variance refers to positive variances or gains; an unfavorable budget variance describes negative variance, indicating losses or shortfalls.

Either may be good or bad, as these variances are based on a budgeted amount. Ideally, as a small business owner, you would hope a financial analysis will result major types of recording transactions in a favorable or positive variance, meaning you are not exceeding your budget. However, that does not mean a negative variance may be unexpected for your quarter or year end.

A difference between an actual cost and a budgeted or standard cost, and the actual cost is the lesser amount. In the case of revenues, a favorable variance occurs when the actual revenues are greater than the budgeted or standard revenues. It is one reason why the company’s actual profits will be better than the budgeted profits. An unfavorable variance occurs when the cost to produce something is greater than the budgeted amount.

Budget variances occur because forecasters are unable to predict future costs and revenue with complete accuracy. Adding the two variables together, we get an overall variance of $4,800 (Unfavorable). Management should address why the actual labor price is a dollar higher than the standard and why 1,000 more hours are required for production.