Plain definition
A favourable variance is an actual result that benefits the stated measure compared with plan, such as revenue above budget or controllable cost below budget. The convention must be stated; lower cost is favourable, while lower revenue is not.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A business budgets materials of and spends . The favourable variance came from a supplier discount, but the lower-priced material caused a higher defect rate. Procurement keeps the saving only after operations confirms that rework does not exceed it.
| Budgeted cost | |
|---|---|
| Actual cost | |
| Saving |
Why it matters
A cost saving can damage margin or customer retention if its later effect is ignored. Testing the mechanism prevents management from rewarding a number that transfers cost into defects or lost sales.
Practical consequence
Report the sign, measure, period, cause, and consequence. Do not call a variance favourable until quality, service, cash timing, and any later cost are considered.