Adverse (or unfavourable) variances - when actual performance is poorer than budgeted performance

Favourable variances – where variance represents a better performance than planned

Identification of the cause of a variance can allow a company to:

- Identify the responsibility

- Take appropriate action

If revenues are greater than budgeted – Favourable variance

If revenues are less than budgeted – Adverse variance

If costs are greater than budgeted – Adverse variance

If costs are less than budgeted – Favourable variance

If businesses regularly analyse variances it allows them to notice if financial plans are inaccurate

If businesses fail to analyse variances on a regular basis they will not be aware of their financial performance compared to what is budgeted