Unfavorable Variance: Definition, Types, Causes, and Example

In accounting, a variance is the difference between the actual and budgeted amounts. An unfavorable variance occurs when the actual amount is greater than the budgeted amount. This can be caused by a number of factors, such as increased costs, lower sales, or changes in the exchange rate.

There are three main types of variances:

• Material variances: These are variances that affect the bottom line. For example, if the actual cost of materials is greater than the budgeted cost, this will result in an unfavorable material variance.
• Labor variances: These are variances that affect the cost of labor. For example, if the actual labor hours worked are greater than the budgeted labor hours, this will result in an unfavorable labor variance.
• Overhead variances: These are variances that affect the cost of overhead. For example, if the actual overhead costs are greater than the budgeted overhead costs, this will result in an unfavorable overhead variance.

The causes of unfavorable variances can vary depending on the type of variance. However, some common causes include:

• Increased costs: This can be caused by a number of factors, such as rising prices for raw materials, higher wages, or increased production costs.
• Lower sales: This can be caused by a number of factors, such as economic conditions, competition, or changes in consumer preferences.
• Changes in the exchange rate: This can occur when the value of the dollar changes relative to other currencies. This can affect the cost of imported goods and services.

Unfavorable variances can have a significant impact on a company's bottom line. Therefore, it is important to identify and understand the causes of these variances so that they can be managed and reduced.

Here is an example of an unfavorable variance:

A company budgeted to spend $100,000 on marketing for the year. However, the actual cost of marketing was $120,000. This resulted in an unfavorable marketing variance of $20,000.

The causes of this variance could be a number of things, such as:

• The company spent more on advertising than it budgeted.
• The company hired more marketing staff than it budgeted.
• The company paid more for marketing materials than it budgeted.

By identifying the causes of this variance, the company can take steps to reduce it in the future. For example, the company could negotiate lower prices for advertising, hire fewer marketing staff, or use less expensive marketing materials.