the meaning of adverse variances and favourable variances
5.5 Budgets – Variances 🎯
Objective: Understand Adverse vs Favourable Variances
In budgeting, a variance is the difference between what you planned (budgeted) and what actually happened (actual).
Favourable variance (??
) means you performed better than planned – you spent less, earned more, or produced more than expected.
Adverse variance (❌) means you performed worse than planned – you spent more, earned less, or produced less than expected.
Quick Formula 📐
Variance = Actual – Budgeted
If Variance > 0 → Favourable
If Variance < 0 → Adverse
Analogy: Road Trip 🚗
Imagine you plan a road trip and budget $200 for fuel.
• If you actually spend $180, you saved $20 – a favourable variance (you’re ahead of schedule).
• If you spend $250, you overspent by $50 – an adverse variance (you’re behind schedule).
This helps you see where you’re doing well or need to adjust.
Example Table 📊
| Item | Budgeted ($) | Actual ($) | Variance ($) | Interpretation |
|---|---|---|---|---|
| Sales Revenue | 10,000 | 12,000 | +2,000 | Favourable ?? |
| Marketing Cost | 3,000 | 3,500 | -500 | Adverse ❌ |
| Production Output | 5,000 units | 4,800 units | -200 units | Adverse ❌ |
Key Takeaway ✨
• A favourable variance shows you’re ahead of budget – great for profits or cost control.
• An adverse variance signals you need to investigate why you overspent or underperformed.
• Regularly reviewing variances helps managers make timely decisions and keep the business on track.
Revision
Log in to practice.