What are unfavorable variances?

What are unfavorable variances?

• A. When actual costs significantly lower budgeted costs
• B. When actual costs exceed budgeted costs
• C. When budgeted income does not meet actual income
• D. When fixed costs are higher than estimated

Answer: (B)

Unfavorable variances occur when actual costs exceed budgeted costs. This situation indicates that an organization is spending more than anticipated, which can lead to decreased profitability and indicate inefficiencies in cost management. Understanding unfavorable variances is crucial for management accounting, as they signal to management that there may be issues in operational efficiency, pricing strategies, or supply chain management that need to be addressed. For example, if a manufacturing company budgeted $100,000 for materials but spent $120,000, the unfavorable variance of $20,000 would prompt a review of the purchasing process, supplier costs, or production methods. The other options reflect different financial situations that do not necessarily align with the definition of unfavorable variances. For instance, significantly lower actual costs than those budgeted indicate a favorable variance, while the budgeted income not meeting actual income does not directly refer to variances in costs but rather income performance. Similarly, fixed costs being higher than estimated also does not define the concept of unfavorable variances but points to potential miscalculations in budgeting fixed costs.

Unfavorable variances occur when actual costs exceed budgeted costs. This situation indicates that an organization is spending more than anticipated, which can lead to decreased profitability and indicate inefficiencies in cost management.

Understanding unfavorable variances is crucial for management accounting, as they signal to management that there may be issues in operational efficiency, pricing strategies, or supply chain management that need to be addressed. For example, if a manufacturing company budgeted $100,000 for materials but spent $120,000, the unfavorable variance of $20,000 would prompt a review of the purchasing process, supplier costs, or production methods.

The other options reflect different financial situations that do not necessarily align with the definition of unfavorable variances. For instance, significantly lower actual costs than those budgeted indicate a favorable variance, while the budgeted income not meeting actual income does not directly refer to variances in costs but rather income performance. Similarly, fixed costs being higher than estimated also does not define the concept of unfavorable variances but points to potential miscalculations in budgeting fixed costs.