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.
Understanding 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.