What is 'Unfavorable Variance'

Unfavorable variance is 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.

Example of Unfavorable Variance

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%.

In practice, an unfavorable variance can take any number of forms or definitions. In budgeting or financial planning and analysis scenarios, unplanned deviations from plan invite the same managerial reactions as unfavorable variances in other business applications. When business results deviate from expectations - ensuing analysis has a way of calling it any number of things - they often come back to the same thing: things did not go to plan.

RELATED TERMS
  1. Yield Variance

    Yield variance describes the difference between actual output ...
  2. Variance

    Variance is the spread between numbers in a data set and their ...
  3. Sales Price Variance

    Sales price variance is the difference between the money a business ...
  4. Portfolio Variance

    The measurement of how the actual returns of a group of securities ...
  5. Cost Control

    The practice of managing and/or reducing business expenses. Cost ...
  6. Variance Swap

    A variance swap allows counterparties to hedge or speculate directly ...
Related Articles
  1. Trading

    Exploring the Exponentially Weighted Moving Average

    Learn how to calculate a metric that improves on simple variance.
  2. Investing

    Computing Historical Volatility in Excel

    We examine how annualized historical volatility is computed from daily log returns, variance and standard deviation.
  3. Investing

    Understanding The Sharpe Ratio

    The Sharpe ratio describes how much excess return you are receiving for the extra volatility that you endure for holding a riskier asset.
  4. Trading

    Trading with Gaussian models of statistics

    The study of statistics originated from Carl Friedrich Gauss and helps us understand markets, prices and probabilities, among other applications.
  5. Investing

    Calculating volatility: A simplified approach

    Though most investors use standard deviation to determine volatility, there's an easier and more accurate way of doing it: the historical method.
  6. Investing

    Earnings Guidance: Can It Predict the Future?

    Explore the controversies surrounding companies commenting on their forward-looking expectations.
  7. Personal Finance

    The Highest-Paying Financial Careers

    Read about the most lucrative positions in the world of finance, where hard-charging professionals can make hundreds of thousands or millions of dollars.
  8. Investing

    How to Calculate the Value of an ETF

    An ETF is a good way to get broad exposure without taking on specific risk, but calculating performance may be a bit tricky.
  9. Investing

    A Guide to Understanding Market Volatility

    Market volatility is inevitable. Understanding how it works can help investors keep calm during periods of short-term declines.
  10. Investing

    Style Matters In Financial Modeling

    If you're looking to get a job as an analyst, you'll need to know how to work it.
RELATED FAQS
  1. What is price variance in cost accounting?

    Understand what price variance is in relation to cost accounting. Learn the most common way price variance arises and how ... Read Answer >>
  2. What is the difference between standard deviation and variance?

    Understand the difference between standard deviation and variance; learn how each is calculated and how these concepts are ... Read Answer >>
  3. How do you calculate beta in Excel?

    Learn how to calculate the beta of an investment using Microsoft Excel. Read Answer >>
  4. What is the difference between variance and covariance?

    Learn about the differences between covariance and variance, and how to use them to minimize your stock portfolio's risk ... Read Answer >>
  5. What is the best measure of a stock's volatility?

    Understand what metrics are most commonly used to assess a security's volatility compared to its own price history and that ... Read Answer >>
  6. What does standard deviation measure in a portfolio?

    Dig deeper into the investment uses of and mathematical principles behind standard deviation as a measurement of portfolio ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center