Favorable variance

Definition

A favorable variance occurs when actual costs are less than standard costs or actual revenues exceed standard revenues. It indicates better performance than expected and can result from cost savings, higher efficiency, or increased sales.

5 Must Know Facts For Your Next Test

1. Favorable variances are typically reported as positive numbers.
2. They can arise in various areas such as materials, labor, and overhead costs.
3. Management uses favorable variances to identify areas of cost control and efficiency.
4. Favorable variances should be analyzed to determine if they are sustainable or due to one-time events.
5. They contribute positively to the overall profitability of a company.

Review Questions

• What does a favorable variance indicate about a company's performance?
• In which areas can favorable variances occur?
• Why is it important for management to analyze favorable variances?

Related terms

Standard Cost: The pre-determined cost of manufacturing a single unit or performing a service under normal conditions.

Unfavorable Variance: Occurs when actual costs exceed standard costs or actual revenues fall short of standard revenues.

Variance Analysis: The process of analyzing the differences between standard costs and actual costs to understand the reasons behind these differences.