Unfavorable Variances

Definition

Unfavorable variances refer to the differences between actual results and budgeted or standard performance, where the actual results are less favorable than the planned targets. These variances indicate that the organization's performance has fallen short of its goals and expectations.

5 Must Know Facts For Your Next Test

1. Unfavorable variances can indicate issues with cost control, operational efficiency, or the accuracy of the budgeting process.
2. Managers use unfavorable variances to identify areas for improvement and to make informed decisions to get the organization back on track.
3. Unfavorable variances can be categorized into different types, such as material cost variances, labor cost variances, and overhead cost variances.
4. Analyzing the root causes of unfavorable variances is crucial to implement corrective actions and prevent their recurrence.
5. Unfavorable variances can have a significant impact on the organization's financial performance and profitability.

Review Questions

• Explain how unfavorable variances are used to evaluate the achievement of budgeted goals.
  • Unfavorable variances indicate that the organization's actual performance has fallen short of its budgeted or standard goals. By analyzing these variances, managers can identify areas where the organization has underperformed and investigate the root causes. This information can then be used to make informed decisions, implement corrective actions, and adjust future budgets and plans to better align with the organization's objectives.
• Describe the different types of unfavorable variances and how they can impact the organization's financial performance.
  • Unfavorable variances can occur in various areas, such as material costs, labor costs, and overhead costs. Material cost variances may indicate issues with purchasing, inventory management, or supplier performance. Labor cost variances can point to inefficiencies in workforce utilization or changes in wage rates. Overhead cost variances can reveal problems with the allocation of fixed and variable costs. These different types of unfavorable variances can have a significant impact on the organization's overall profitability, as they directly affect the cost of goods sold and the organization's ability to meet its financial targets.
• Analyze how the investigation and understanding of unfavorable variances can lead to improved budgeting and decision-making processes.
  • The thorough investigation and analysis of unfavorable variances can provide valuable insights that can enhance the organization's budgeting and decision-making processes. By identifying the root causes of these variances, managers can make necessary adjustments to the budgeting assumptions, improve the accuracy of cost estimates, and implement more effective control measures. This, in turn, can lead to more realistic and achievable budgets, better resource allocation, and more informed decision-making. Furthermore, the lessons learned from analyzing unfavorable variances can be used to refine the organization's planning and control systems, ultimately improving its overall performance and the achievement of its goals.

Related terms

Favorable Variances: Favorable variances occur when the actual results are better than the budgeted or standard performance, indicating that the organization has exceeded its goals and expectations.

Variance Analysis: Variance analysis is the process of investigating and understanding the reasons for the differences between actual and budgeted or standard performance, whether favorable or unfavorable.

Cost Variances: Cost variances are the differences between actual costs and budgeted or standard costs, which can be either favorable or unfavorable.