Q2RQ - Horngren'S Financial And Managerial Accounting

Question

Explain the difference between a favorable and an unfavorable variance.

Step-by-Step Solution

Answer

Answer

Favorable variance is suitable for a business entity, while unfavorable variance is not suitable for the business entity. 

Step 1: Definition of Variance Analysis

The analysis used to determine the difference between the actual activity level and the standard activity level is known as variance analysis. This is carried out to control the business process.

Step 2: Difference between favorable and unfavorable variance

Unfavorable variance: The variance between the actual and estimated activity is said to be unfavorable when the results are not in favor of the business entity. For example, the estimated expenses are lower than the actual expenses of the business entity.

Favorable variance: Variance is said to be favorable when the difference between the actual activity and the estimated activity favors the business entity. For example, the revenue earned by the business entity is higher than the expected revenue.