Favorable Variance
AdvancedA favorable variance is a difference between actual and budgeted or standard results that improves profit, such as costs coming in lower than budget or revenue higher than budget.
Variance analysis compares actual results with what was planned. A variance is favorable when actual revenue exceeds the budget or actual costs are lower than the budget.
For example, if a department's budget for supplies was 50,000 and it actually spent 46,000, it has a favorable variance of 4,000.
A favorable variance is not always good news. Lower spending might come from delaying necessary maintenance, using cheaper, poorer-quality materials or underspending on marketing that would have supported future sales. A favorable material price variance might be linked to an unfavorable usage variance if cheap materials cause more waste.
Variances should therefore be investigated to understand their causes, not simply praised or criticised. Budgets set too cautiously can also produce favorable variances that reflect easy targets rather than good performance. In British English, the spelling favourable is used.
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