What is a favorable variance?

A favorable variance occurs when actual performance exceeds the budgeted expectations, indicating that the company is doing better than predicted in either its revenues or expenses. For example, if actual sales revenue is higher than the budgeted sales revenue, this results in a favorable variance because it reflects an increase in income relative to what was planned.

In terms of expense management, if actual expenses are lower than budgeted expenses, this would also count as a favorable variance, as it suggests that the company has been able to control costs more effectively than anticipated. This positive deviation from the budget generally indicates better financial health and operational effectiveness.

This variance is crucial for decision-making and financial analysis, as it helps management understand areas where the company is performing well and to adjust strategies or forecasts accordingly. Understanding such variances supports strategic planning and resource allocation to maintain or improve profitability.

Other options do not capture the essence of what a favorable variance represents. For instance, simply exceeding all expenses while it does reflect financial performance, does not directly address the comparison between actual outcomes and budgeted expectations, which is central to defining a favorable variance.