What is a favorable variance a
variance is the differement from the actuals, it the differencefrom what is expected and what is actuals, it may be favourable andunfavourable depends upon the nature and type of data or componentswe are looking at.
Favourable variances arises in case where the actual cost isless than expected and actual profit is more than expected. Herethe crux is that favourable means beneficial for the entity, lesscost and more profit is always favourable.
on Contrary Unfavourable variance arises in case where theactual costs is more than expected and actual profit is less thanexpected. Here unfavourable means the loss to the entityi.e morecost and less profits are always unfavourable.
2. Variance is calculated as the difference of the actual costsvs expected cost , or actual profit v/s expected profits. For eachcost components the variance can be calculated using variousformula
for eg.Material Variance : It has Material price variance andmaterial efficiency variance , combining both will give thematerial cost variance . The formula for material cost variance =Standard material cost – Actual material cost.
3 The favourable variance is not always a bad thing, but is agoods thing as it will involve lesser cost to the entity and higherprofit. In the same way unfavourable variance is not always goodthing but it is bad thing as it involves higher costs and lesserprofits.
4. Example : Let ABC company makes a product which required 5 kgof raw material at price of $10 per kg , during the period thecompany makes, 10 units , and used material of 55kg which it boughtat $9 per kg.
Now in the given example the data of 1 unit is given asstandard, and actual 10 units are produced so first standard datafor 10 units needs to be calculated,
standard material requirement for 10 units : for 1 unit 5 kg ,thus for 10 units = 50 kg material required. standard rate is givenas $ 10 per kg.
Thus standard Material cost = Standard units * standard rate =50 kg* $10 per kg = $ 500 .
Actuals Material cost = Actual units * Actual rate = 55 kg * $ 9per kg = $ 495
Here The variance for material cost = Standard cost – Actualcost = $ 500 – $495 = $ 5 Favourable.
In this case the variance is $ 5 which is favourable as actualcost is less than standard cost.