Adverse and favourable variances

Overview

Favourable and adverse variances with worked examples, internal and external causes, when a variance is acceptable, and management by exception.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is a variance?

   Model answer

   A variance is the difference between a budgeted figure and the actual figure. Variances show where results have departed from the plan.

2. 2

   What is a favourable variance?

   Model answer

   A favourable variance arises when the actual result is better for profit than the budget. Revenue above budget or costs below budget are favourable.

3. 3

   What is an adverse variance?

   Model answer

   An adverse variance arises when the actual result is worse for profit than the budget. Revenue below budget or costs above budget are adverse.

4. 4

   A consultancy budgeted fee income of £120,000 and earned £132,000. Calculate the variance and state whether it is adverse or favourable.

   Model answer

   The variance is £12,000 favourable. The working is £132,000 − £120,000 = £12,000, and revenue above budget is favourable.

5. 5

   A law firm budgeted staff costs of £45,000 but spent £49,500. Calculate the variance and state whether it is adverse or favourable.

   Model answer

   The variance is £4,500 adverse. The working is £49,500 − £45,000 = £4,500, and costs above budget are adverse.

6. 6

   An accountancy practice budgeted rent of £18,000 but paid £16,200. Calculate the variance as an amount and as a percentage of the budget.

   Model answer

   The variance is £1,800 favourable, which is 10% of the budget. The working is £18,000 − £16,200 = £1,800, then 1,800 ÷ 18,000 × 100 = 10%.

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.