Gauging the Favorableness of Variances When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad. Note: Use the minus sign to indicate negative values (when the budgeted amount is greater than the actual) If a company calculates that the actual cost for materials used was $3,600,000, and the amount budgeted for those materials was $4,800,000, the actual cost for materials used less the budgeted cost for materials used is the budgeted cost at actual hours worked. This tells you that the actual cost at actual materials used is less than What type of variance is this? Favorable direct materials price variance If a company calculates that the budgeted cost for actual materials used is $180,000, and the budgeted cost at the budgeted amount of materials to have been used is $110,000, the budgeted cost at actual materials used less the budgeted cost at budgeted materials to have been used is the actual materials used at budgeted cost is greater than the budgeted materials used at budgeted cost. This tells you that What type of variance is this? Unfavorable direct materials quantity variance Feedback Check My Work Subtract the budgeted amount from the actual amount to get the sign correct. Note that if an amount spent or quantity used for materials goes down, then profits for the company go up, so a negative direct materials cost variance is favorable. Likewise, an increase in the amount spent or quantity used would decrease profits, so this would be an unfavorable variance