What are the two types of variances?

The two types of variances in business administration are classified as adverse and favourable. This classification relates to the performance against a budget or a standard.

When a variance is deemed favourable, it indicates that the actual performance is better than the budgeted expectations. For example, if a company’s revenue exceeds its budget projections, this would be a favourable variance as it contributes positively to profitability.

On the other hand, an adverse variance signifies that actual performance falls short of expectations. This can occur when costs are higher than planned or revenue is lower than projected, indicating areas needing management attention to address financial performance or operational efficiency.

This understanding is critical for effective budget management, allowing organizations to analyze where financial resources are being well spent or where corrective actions may be necessary to realign with financial goals.