Definition of a Variance
In accounting the term variance usually refers to the difference between an actual amount and a planned or budgeted amount. For example, if a company’s budget for repairs expense is $50,000 and the actual amount ends up being $45,000 or $63,000, there will be a variance of $5,000 or $13,000 respectively. Similarly, if a company has budgeted its revenues to be $280,000 and the actual revenues end up being $271,000 or $291,000, there will be a variance of $9,000 or $11,000 respectively.
When is a Variance Unfavorable
The term unfavorable variance indicates that the variance (or difference between the budgeted and actual amounts) was not good for the company’s profits. In other words, this unfavorable variance is one reason for the company’s actual profits being worse than the budgeted profits.
Unfavorable Expense Variance
If repairs expense was budgeted to be $50,000 but the actual repairs expense ends up being $63,000, the $13,000 variance is unfavorable because having more actual expenses than were budgeted was not good for the company’s profits. It is one reason why the company’s actual profits were worse than the budgeted profits.
Unfavorable Revenue Budget
If a company has budgeted its revenues to be $280,000 and the actual revenues end up being $271,000, the company will have an unfavorable variance of $9,000. The variance is unfavorable because having less actual revenues than the budgeted amount was not good for the company’s profits. It will also be one reason for the company’s actual profits being worse than the budgeted profits.
