Favorable and Unfavorable Variances
Interpreting Budget Differences
A favorable variance improves profitability relative to the budget, while an unfavorable variance reduces profitability. However, managers should investigate the underlying causes because not all favorable variances benefit the organization in the long run.
Tip
Always investigate significant favorable variances as well as unfavorable ones because both may reveal important operational issues.
Summary
The value of a variance depends on its cause, not simply whether it is favorable or unfavorable.