Financial Performance variances add or subtract

jodyewhite

Hi
I'm a little confused with adverse and favourable variances, how I understood was adverse you add and favourable you subtract.
From answering the online exams both variances have been subtracted when one is favourable and adverse.
Exam 1 question 2a the variance is £1665 adverse this has been subtracted.
Exam 2 question 2a the variance is £14850 favourable this has been subtracted too.

Many Thanks
JO

KoopaCooper

True, but...a variance can be the same sign but be adverse or favourable depending on whether it's income or expense.

Income is £250 higher than expected = favourable
Cost of sales is £250 higher than expected = adverse

Maybe that's what was going on there?

N4T

Hi @jodyewhite

When you say subtracted do you mean the variance is negative?

I avoid using negative or positive signs for variances because it can be confusing, as @KoopaCooper explained an adverse or favourable variance can be either positive or negative depending on the variance you are looking at. It's more useful to understand what the variance means.

Exam 1 2a is material price variance £1665 adverse. This means the actual price is more than standard price at actual quantity. Working with negative/positive signs, I make that a positive £1665 for adverse

The equation is AQ.AP - AQ.SP = + ve £1665 (where AQ.AP = £10,915 and AQ.SP = £9250



Exam 2 2b is labour rate variance £14,850 favourable. This means the actual rate is less than the standard rate at actual hours. I make this negative £14,850 for favourable variance.

The equation is AH.AR - AH.SR = -ve £14,850 (where AH.AR = £157,410 and AH.SR= £172,260)



Did you get the answers correct?

jodyewhite

Thank you that has helped understand the method better.
JO