Definition
Adverse Variance (Unfavourable Variance) refers to the difference between the actual performance and the budgeted or standard performance in an organization, where the actual figures cause a reduction in the estimated profits. This can happen if actual sales revenue is less than what was budgeted, or if actual costs surpass the budgeted costs.
Examples
Sales Revenue Adverse Variance: Company ABC anticipated sales revenue of $500,000 in Q1. The actual sales revenue turned out to be $450,000. The adverse variance is $50,000.
Cost Adverse Variance: Company XYZ budgeted $200,000 for manufacturing costs, but the actual costs were $220,000. The adverse variance is $20,000.
Frequently Asked Questions
1. What causes an adverse variance?
- Adverse variance can be caused by lower-than-expected sales, higher-than-expected costs, inefficiencies in production, unexpected market conditions, or errors in budgeting.
2. How can an organization manage adverse variances?
- Organizations can manage adverse variances by analyzing the causes, implementing cost-control measures, improving operational efficiencies, and adjusting pricing strategies.
3. What is the difference between an adverse variance and a favourable variance?
- An adverse variance occurs when actual performance is worse than budgeted performance, reducing profit. A favourable variance happens when actual performance is better than budgeted, increasing profit.
4. Are adverse variances always negative?
- While adverse variances indicate a shortfall in performance, they offer diagnostic value by highlighting areas needing improvement.
5. Can adverse variances be predicted?
- Adverse variances can sometimes be predicted through trend analysis, market research, and other forecasting techniques.
Related Terms
1. Standard Costing: A costing method where standard costs are assigned to production activities, helping in variance analysis.
2. Budgetary Control: A financial control technique where actual performance is monitored against budgeted figures to manage financial activities effectively.
3. Favourable Variance: The positive difference between actual and budgeted figures where actual performance is better, leading to increased profits.
4. Analysis of Variance (ANOVA): A statistical method used to identify differences among group means, often used in budgeting to compare variances.
5. Variance: The difference between actual and budgeted figures, which can be either favourable or adverse.
Online Resources
Suggested Books for Further Studies
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren
- Accounting for Decision Making and Control by Jerold Zimmerman
- Budgeting and Financial Management for Nonprofit Organizations by Lynne A. Weikart
Accounting Basics: “Adverse Variance” Fundamentals Quiz
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