Favourable and unfavourable variance
Favourable and unfavourable variance: the sign convention of variance analysis — favourable means a variance pushes budgeted profit up, unfavourable (or adverse) means it pushes profit down.
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Budgeted revenue of €200,000 against actual revenue of €215,000 is a €15,000 favourable variance, since higher revenue raises profit. Budgeted material cost of €80,000 against actual cost of €86,000 is a €6,000 unfavourable variance, since higher spending lowers profit. Both actuals exceed budget, but the sign that matters is the effect on profit.
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SubjectManagerial AccountingCoreTopicStandard Costing & Variance AnalysisCore
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PracticeCORE
A company budgets direct labour cost of €54,000 for the month. Actual direct labour cost comes in at €49,500. What is the labour cost variance, and is it favourable or unfavourable?
Select an answer to check your understanding.