What does a favorable variance indicate?

A favorable variance is the excess amount of a standard or budgeted amount over the actual amount incurred. A favorable variance can apply to revenues or expenses. In these cases:

• A higher revenue level than expected is a favorable variance
• A lower expense level than expected is a favorable variance

Obtaining a favorable variance (or, for that matter, an unfavorable variance) does not necessarily mean much, since it is based upon a budgeted or standard amount that may not be an indicator of good performance.

In particular, favorable variances related to price (such as the labor rate variance and purchase price variance) are only derived from the difference between actual and expected prices paid, and so have no bearing at all on the efficiency of a company's operations.

Budgets and standards are frequently based on politically-derived wrangling to see who can beat their baseline standards or budgets by the largest amount. Consequently, a large favorable variance may have been manufactured by setting an excessively low budget or standard. The one time when you should take note of a favorable (or unfavorable) variance is when it sharply diverges from the historical trend line, and the divergence was not caused by a change in the budget or standard.

Related Topics

Standard costing overview
Fixed overhead spending variance
Labor efficiency variance
Labor rate variance
Material yield variance
Purchase price variance
Sales volume variance
Selling price variance
Variable overhead efficiency variance
Variable overhead spending variance
What is a controllable variance?
What is a rate variance?
What is a volume variance?