In variance analysis, what does a favorable variance indicate?

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Question: In variance analysis, what does a favorable variance indicate?

Options:

Correct Answer: Higher revenues than budgeted

Solution:

A favorable variance indicates that actual revenues are higher than budgeted or actual costs are lower than budgeted.

In variance analysis, what does a favorable variance indicate?

In variance analysis, what does a favorable variance indicate?

Step 1: Understand what variance analysis is. It is a way to compare what was planned (budgeted) to what actually happened (actual results).
Step 2: Know the two main components of variance: revenues and costs.
Step 3: A favorable variance occurs when actual revenues are greater than what was expected (budgeted).
Step 4: A favorable variance can also happen when actual costs are less than what was planned (budgeted).
Step 5: In simple terms, a favorable variance means you made more money than expected or spent less money than expected.

Variance Analysis – A method used to analyze the difference between actual financial performance and budgeted performance.
Favorable Variance – A situation where actual revenues exceed budgeted revenues or actual costs are less than budgeted costs, indicating better performance.