Definition: 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.
What Does Unfavorable Variance Mean?
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.
As with most estimates, budgets are rarely completely accurate. Some budgets and goals are achieved and others are not. When a budget is achieved the budgeted revenue and expenses are the same as the actual revenue and expenses.
Sometime companies don’t achieve their budgets and the actual expenses are higher than the estimates or the projected revenues are lower than the estimates. The difference between these estimates and the actual revenues and expenses is considered an unfavorable variance because higher expenses and lower revenues result in lower net income than expected.
Other times companies not only achieve their budgeted number, they exceed them. The difference between the actual and budgeted numbers that results in more net income than expected is considered a favorable variance. Companies with favorable variances often have spending surpluses and additional money for future periods.