In budget variance reporting, how are favorable and unfavorable variances defined?

• A. Favorable variance means actual results are better than budget (lower costs or higher revenue); unfavorable means worse.
• B. Favorable variance means costs exceeded budget
• C. Unfavorable means higher revenue than budget
• D. There is no difference between favorable and unfavorable

Answer: (A)

When you look at budget variance reporting, you compare actual results to what was budgeted and label the variance by whether the outcome is better or worse than planned. A favorable variance means the actual result is better than the budget—costs are lower than planned or revenue is higher than planned—which improves profitability. An unfavorable variance means the opposite: costs exceed the budget or revenue is lower than budget, which hurts profitability. For example, actual expenses of 90,000 against a 100,000 budget are favorable, and actual revenue of 120,000 against a 110,000 budget is also favorable. Conversely, expenses at 110,000 against 100,000 or revenue at 100,000 against 110,000 are unfavorable. The correct description is that favorable means better-than-budget results, while unfavorable means worse-than-budget results.