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In variance analysis, what does a favorable variance indicate?

Practice Questions

Q1
In variance analysis, what does a favorable variance indicate?
  1. Higher costs than budgeted
  2. Lower costs than budgeted
  3. Higher revenues than budgeted
  4. Lower revenues than budgeted

Questions & Step-by-Step Solutions

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.
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