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How does variance analysis compare actual results with the budget, and what do favourable and unfavourable variances tell management?

Calculate budget variances for revenue and expenses, classify them as favourable or unfavourable, and explain how variance analysis supports control and decision-making

WACE Year 12 Accounting and Finance Unit 4 on variance analysis: comparing actual results with the budget, calculating revenue and expense variances, classifying them as favourable or unfavourable, and using them for control and management decision-making.

Generated by Claude Opus 4.76 min answerUpdated 2026-05-29

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What this dot point is asking
What a variance is
Favourable versus unfavourable
Investigating variances

What this dot point is asking

SCSA wants you to calculate variances, label them favourable or unfavourable using the effect on profit, and explain how they drive corrective action.

What a variance is

Favourable versus unfavourable

The label depends on the effect on profit, not on whether the number went up or down.

Investigating variances

Not every variance matters. Managers apply the principle of management by exception, investigating only variances large enough to be material. A variance prompts questions about its cause: was the budget unrealistic, did input prices change, was efficiency better or worse than expected? The answer guides corrective action, such as renegotiating supply prices or revising the next budget.

A variance is not automatically a sign of poor management. A favourable variance can be just as worth investigating as an unfavourable one, because it may reveal that the budget was set too cautiously, or that quality was cut to save cost. Variances should also be read together rather than in isolation, since a favourable expense variance achieved by underspending on maintenance may cause larger unfavourable variances in later periods. Used well, variance analysis closes the loop between planning and control: the budget sets the target, the variance measures the gap, and the response feeds back into the next budget so that future plans become more realistic.

Calculating and classifying variances

Orin Ltd budgeted sales of $400 000 and total expenses of$ 310 000, for a budgeted profit of $90 000. Actual sales came in at$ 385 000 and actual expenses at $300 000.

Sales variance: actual $385 000 less budget$ 400 000 is $15 000 below budget. Because lower revenue reduces profit, this is a$ 15 000 unfavourable variance.

Expense variance: actual $300 000 less budget$ 310 000 is $10 000 below budget. Because spending less raises profit, this is a$ 10 000 favourable variance.

Actual profit is $385\,000 - 300\,000 = 85\,000$ , against budgeted $90 000, a$ 5 000 unfavourable profit variance. This reconciles: the $15 000 unfavourable sales variance partly offset by the$ 10 000 favourable expense variance nets to $5 000 unfavourable, telling management the shortfall came from weaker sales rather than cost control.