what is unfavorable variance 
unfavorable variance is an accounting term that describes instances where actual costs are greater than the standard or projected costs an unfavorable variance can alert management that the company s profit will be less than expected the sooner an unfavorable variance is detected the sooner attention can be directed towards fixing any problems understanding unfavorable variancea budget is a forecast of revenue and expenses including fixed costs as well as variable costs budgets are important to corporations because it helps them plan for the future by projecting how much revenue is expected to be generated from sales as a result companies can plan how much to spend on various projects or investments in the company companies create sales budgets which forecast how many new customers for new products and services are going to be sold by the sales staff in the coming months from there companies can determine the revenue that will be generated and the costs needed to bring in those sales and deliver those products and services eventually the company can project its net income or profit after subtracting all of the fixed and variable costs from total revenue if the net income is less than their forecasts the company has an unfavorable variance in other words the company hasn t generated as much profit as it had hoped however an unfavorable variance doesn t necessarily mean the company took a loss instead it merely means that the net income was lower than the forecasted projections for the period the unfavorable variance could be the result of lower revenue higher expenses or a combination of both oftentimes an unfavorable variance could be due to a combination of factors the shortfall could be due in part to an increase in variable costs such as a price increase in the cost of raw materials which go into producing the product the unfavorable variance could also be due in part to lower sales results versus the projected numbers types of unfavorable variancesin practice an unfavorable variance can take any number of forms or definitions in budgeting or financial planning and analysis scenarios unplanned deviations from plan invite the same managerial reactions as unfavorable variances in other business applications when business results deviate from expectations the ensuing analysis may describe the variance in different ways but the end result is usually the same things did not go according to plan in finance unfavorable variance refers to a difference between an actual experience and a budgeted experience in any financial category where the actual outcome is less favorable than the projected outcome publicly traded companies with stocks listed on exchanges such as the newyork stock exchange nyse typically forecast earnings or net income quarterly or annually companies that fail to meet their earnings forecasts essentially have an unfavorable variance within their company whether it be from higher costs lower revenue or lower sales a sales variance occurs when the projected sales volumes of a product or service don t meet the goal or projected figures a company may not have hired enough sales staff to bring in the projected number of new clients a management team could analyze whether to bring in temporary workers to help boost sales efforts management could also offer target based financial incentives to salespeople or create more robust marketing campaigns to generate buzz in the marketplace for their product or service in manufacturing the standard cost of a finished product is calculated by adding the standard costs of the direct material direct labor and direct overhead which are the direct costs tied to production an unfavorable variance is the opposite of a favorable variance where actual costs are less than standard costs rising costs for direct materials or inefficient operations within the production facility could be the cause of an unfavorable variance in manufacturing causes of unfavorable variancesan unfavorable variance can occur due to changing economic conditions such as lower economic growth lower consumer spending or a recession which leads to higher unemployment market conditions can also change such as new competitors entering the market with new products and services companies could also suffer from lower revenue and sales if new technology advances make their products outdated or obsolete it s critical that a company s management team analyze an unfavorable variance and pinpoint the cause once the cause is determined the company can make the necessary changes and get back on target with their plan example of unfavorable variancefor example let s say that a company s sales were budgeted to be 200 000 for a period however the company only generated 180 000 in sales the unfavorable variance would be 20 000 or 10 similarly if expenses were projected to be 200 000 for the period but were actually 250 000 there would be an unfavorable variance of 50 000 or 25 