Unfavorable Variance

AAA

DEFINITION of 'Unfavorable Variance'

An accounting term that describes instances where actual costs are greater than the standard or expected costs. An unfavorable variance can alert management that the company's profit will be less than expected. The sooner an unfavorable variance is detected, the sooner attention can be directed towards fixing any problems.

In manufacturing, the standard cost of a finished product is calculated by adding the standard costs of the direct material, direct labor and direct overhead. An unfavorable variance is the opposite of a favorable variance where actual costs are less than standard costs.
 

BREAKING DOWN 'Unfavorable Variance'

In finance, unfavorable variance refers to a difference between an actual experience and a budgeted experience in any financial category where the actual outcome is less favorable than the projected outcome. For example, if sales were budgeted to be $200,000 for a period but were actually $180,000, there would be an unfavorable (or negative) variance of $20,000, or 10%. Similarly, if expenses were projected to be $200,000 for a period but were actually $250,000, there would be an unfavorable variance of $50,000, or 25%.

RELATED TERMS
  1. Activity Cost Driver

    A factor that influences or contributes to the expense of certain ...
  2. Budget Variance

    A periodic measure used by governments, corporations or individuals ...
  3. Balanced Budget

    A situation in financial planning or the budgeting process where ...
  4. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  6. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs ...
Related Articles
  1. Budgeting

    How Budgeting Works For Companies

    Learn how to break down and understand a corporate budget.
  2. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  3. Economics

    Explaining Replacement Cost

    The replacement cost is the cost you’d have to pay to replace an asset with a similar asset at the present time and value.
  4. Economics

    How Does National Income Accounting Work?

    National income accounting is an economic term describing the system used by a country to gather data and determine aggregate economic activity.
  5. Fundamental Analysis

    Understanding the EBITDA/EV Multiple

    The EBITDA/EV multiple is a financial ratio that measures a company’s return on investment.
  6. Term

    What is Wealth Management?

    Wealth management combines financial and investment advice, accounting and tax services, and legal and estate planning.
  7. Personal Finance

    AR & Inventory Turnover Is Key For These Sectors

    Accounts receivable and inventory turnover are two important ratios in the current asset category. We will also discuss the key industries that benefit from a thorough understanding of these ...
  8. Economics

    Explaining Double Entry Accounting

    Double entry is an accounting and bookkeeping term describing the method of entering transactions into the accounting records.
  9. Economics

    Understanding Deferred Income Tax

    Deferred income tax is a liability on a balance sheet that reflects income tax that is allocable to the current period, but has not yet been paid.
  10. Investing

    Companies You Never Thought Would Go Bankrupt

    Learn about some of the most shocking corporate bankruptcies in history, including General Motors, Chrysler, Lehman Brothers and Enron.
RELATED FAQS
  1. What does an unfavorable variance indicate to management?

    In managerial accounting, an unfavorable variance is discovered when a company's management performs a comparison between ... Read Full Answer >>
  2. How is an unfavorable variance discovered?

    An unfavorable variance is discovered when actual numbers and budget numbers are compared. Unfavorable variance can be computed ... Read Full Answer >>
  3. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  4. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  5. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  2. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  3. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  4. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  5. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
  6. Marlboro Friday

    A reference to Friday, April 2, 1993, when Philip Morris, the maker of Marlboro cigarettes, announced that it would be cutting ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!