Unfavorable variance

Definition

Unfavorable variance occurs when actual costs exceed standard costs, indicating higher expenses than planned. It signals inefficiencies or higher resource consumption in production or operations.

5 Must Know Facts For Your Next Test

1. Unfavorable variance can occur in both material and labor costs.
2. It is calculated by subtracting the standard cost from the actual cost.
3. An unfavorable variance may indicate issues such as waste, inefficiency, or price increases.
4. Management uses variance analysis to identify areas needing improvement.
5. Consistently high unfavorable variances can suggest problems with budgeting or forecasting.

Review Questions

• How is an unfavorable variance calculated?
• What might a consistently high unfavorable variance indicate?
• Why is it important for management to analyze unfavorable variances?

Related terms

Standard Cost: A predetermined cost based on expected conditions and efficient operations.

Favorable Variance: Occurs when actual costs are less than standard costs, indicating better-than-expected performance.

Variance Analysis: The process of examining differences between actual and budgeted financial outcomes to understand performance.