Unfavourable Variance

Written by Fmi.Online Thursday November 10, 2022
An unfavorable variance occurs when the difference between actual revenues and costs compared with the budgeted revenues and costs results in a lower net income. In other words, management’s budgeted and projected revenues and expenses resulted in a higher net income than the actual net income.

Explanation :

Most companies prepare budgets to help track expenses and achieve financial performance goals. There are many different forms of budgets as well as planning strategies, but most budgets start the same way. Management analyzes the past performance of the company and estimates future performance based on expected market and economic changes. Then management projects a budget and goals for the upcoming year.

In a nutshell :

  • Unfavorable variance is an accounting term that describes instances where actual costs are higher than the standard or projected costs.
  • An unfavorable variance can alert management that the company's profit will be less than expected.
  • The unfavorable variance could be the result of lower revenue, higher expenses, or a combination of both.
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