Unfavorable Variance: Definition, Types, Causes, and Example

Unfavorable variance occurs when actual financial results are worse than planned or budgeted results — for example, actual costs exceed budgeted costs or actual revenue falls short of forecasts. Detecting and analyzing unfavorable variances helps management identify problems early and take corrective action to protect profitability.

Key takeaways
* Unfavorable variance = actual result less favorable than budgeted/standard result.
* It can arise from lower revenue, higher costs, or both.
* Timely variance analysis lets managers pinpoint causes and implement fixes.

What is an unfavorable variance?
* Basic formula:
* Variance = Actual − Budgeted
* For costs: variance is unfavorable when Actual Cost > Budgeted Cost.
* For revenue: variance is unfavorable when Actual Revenue < Budgeted Revenue.
* Expressing the variance as a percentage helps assess materiality:
* % Variance = (Actual − Budgeted) / Budgeted × 100%

Types of unfavorable variances
* Revenue (sales) variance
* Sales volume or price falls short of projections (fewer units sold, lower selling prices).
* Cost variances
* Direct materials: higher-than-expected raw material prices or waste.
* Direct labor: higher wage rates, overtime, or lower productivity.
* Manufacturing overhead: increased utilities, maintenance, or inefficient capacity use.
* Standard-cost variances (manufacturing)
* Differences between standard costs (material, labor, overhead) and actual costs.
* Forecast/earnings variance
* Public companies that miss earnings forecasts produce an unfavorable variance relative to investor expectations.

Common causes
* External factors
* Economic slowdown, reduced consumer spending, recession.
* Increased competition, technological disruption, changing customer preferences.
* Volatile input prices (commodities, energy).
* Internal factors
* Poor sales performance or weak marketing.
* Inefficient production, high scrap/waste, or equipment downtime.
* Inaccurate budgeting or unrealistic assumptions.
* Staffing shortages, inadequate training, or high turnover.

How to analyze unfavorable variances
1. Identify which line items show variances and quantify them (absolute and percentage).
2. Break down variances into price (rate) vs. quantity (volume) effects where applicable.
3. Investigate root causes with operations, procurement, sales, and finance teams.
4. Classify variances as controllable or uncontrollable.
5. Develop corrective actions and assign owners and timelines.
6. Monitor results and update forecasts or budgets if required.

Example
* Budgeted sales for a period: $200,000
* Actual sales: $180,000
* Sales variance = $180,000 − $200,000 = −$20,000 (unfavorable)
* Percentage variance = −$20,000 / $200,000 × 100% = −10%
* Example for expenses:
* Budgeted expenses: $200,000; Actual expenses: $250,000
* Expense variance = $50,000 unfavorable (25%)

Management responses and mitigation
* Revenue-side actions: strengthen sales and marketing, revise pricing, offer promotions, improve product-market fit.
* Cost-side actions: renegotiate supplier contracts, improve procurement, reduce waste, streamline processes, optimize labor scheduling.
* Planning and controls: implement rolling forecasts, tighter budget discipline, variance thresholds, and frequent reporting.
* Longer term: invest in productivity improvements, automation, staff training, and hedging strategies for input-price risk.

Preventing recurring unfavorable variances
* Build realistic budgets using historical data and sensitivity analysis.
* Use rolling forecasts and update assumptions regularly.
* Establish early-warning variance reports and triggers for investigation.
* Encourage cross-functional reviews so operating issues are surfaced quickly.

Conclusion
Unfavorable variances signal that actual performance diverged from expectations. Systematic variance analysis — quantifying differences, ruling in or out causes, and acting promptly — helps organizations correct course and improve budgeting accuracy over time.