Question

How are unfavorable variances recorded? How are favorable variances recorded?

Answer 1

While recording an unfavorable variance it is  debited to the Materials Purchase Price variance A/c  and a Favorable variance is  credited to the material purchase price variance A/c.

In process of  budgeting a company does its best to estimate the sales revenues and expenses it will incur during the upcoming financial year. After end of financial year  management will compare budgeted figures with actual ones and calculate variances. If revenues are higher than expected, or expenses are lower, the variance is favorable. If revenues are lower than budgeted or expenses are higher, the variance is unfavorable.

Favorable Variances

Variances may be  favorable or unfavorable. A favorable variance arises when net income is higher than originally expected or budgeted. In simple when actual expenses are lower than budgeted expenses, the variance is favorable. simillarly if actual revenues are higher than expected, the variance is favorable.

Unfavorable Variances

When revenues are lower than expected, simillarly expenses are higher than expected, the variance is unfavorable. Unfavorable variances are labeled as such or mentioned as a negative number.