Question

describe a situation when a favorable variance would not be good for the company?

describe a situation when an unfavorable variance would not be bad?

Answer 1

A favorable variance is when the actual cost/expenses are lesser than the budgeted cost/expenses or actual revenues are higher than estimated numbers.

A favorable or unfavorable variance is only a financial indicator.

A favourable variance does not necessarily mean that it's beneficial for the organization. For e.g. lesser labour costs incurred as compared to budgeted labour costs will result in favorable variance but might be due to drop in overall sales from estimated figures.

Similarly, an unfavorable variance does not necessarily mean that's it's bad for the organization. For e,g, the organization had estimated lower material costs which also resulted in higher wastage. Although the material cost increased due to purchase of higher quality material leading to unfavorable variance, the organization was able to reduce wastage leading to profit maximization.