Should both favorable and unfavorable variances be investigated, or only the unfavorable ones?  Explain.

Week 3 Discussion 2 Should both favorable and unfavorable variances be investigated? Explain-Sample Solution

Favorable and Unfavorable Variance

  A favorable variance signifies that a business either made more money than planned or spent less than anticipated (Davis & Davis, 2020). Unfavorable variance, on the other hand, is a disparity between the business’s expected and actual financial outcomes. According to Davis and Davis (2020), reporting favorable and unfavorable variance is a critical aspect of the control system, where the budget serves as the benchmark for performance, and deviations from it are either rewarded or penalized. Therefore, a firm must examine both positive and negative variations. Understanding how the differences are generated is necessary for expanding on successful performance.(Investigating-favourable Vs Unfavourable Variances Essay-Sample)

Investigating the favorable variance is necessary since budgets and standards depend on politically developed assumptions to determine the company that can beat its budgets by the highest amount (Davis & Davis, 2020). In this case, the company may establish a substantial favorable variance based on a meager budget. Generally, companies should consider the favorable and unfavorable variance in cases where there are sharp deviates from the historical trend line, which was not brought on by a change in the budget or standard. A favorable variance enables a company to identify strengths, and investigating them can help improve its capabilities.(Investigating-favourable Vs Unfavourable Variances Essay-Sample)

Consequently, Davis and Davis (2020) observe that investigating unfavorable variance is crucial due to its potential to generate losses for a business. In most cases, a slight favorable or unfavorable variance may result from the company or economic environment and is therefore unavoidable. For this reason, many businesses use the management by exception strategy, which analyzes variances to identify any excess on the predetermined threshold. It helps companies to determine areas of inconsistency in their processes and resolve any issues that may negatively affect them.(Investigating-favourable Vs Unfavourable Variances Essay-Sample)

Reference

Davis, C. E., & Davis, E. (2020). Managerial accounting. (4th ed.). Hoboken, NJ: Wiley. ISBN: 9781119577638