From Quiet Flag Industries data, which statement is true about the variance outcomes?

• A. Revenue variance is favorable, and the operating cost variance is favorable
• B. Revenue variance is favorable, while the operating cost variance is unfavorable
• C. Revenue variance is unfavorable, and the operating cost variance is favorable
• D. Revenue variance is unfavorable, and the operating cost variance is unfavorable

Answer: (A)

In variance analysis, a variance is labeled favorable when the actual result is better than what was budgeted for that item. For revenue, that means actual revenue is higher than the budgeted amount. For operating costs, it means actual costs are lower than the budgeted amount. If Quiet Flag Industries shows that actual revenue exceeded the budget while actual operating costs were lower than the budget, both variances are favorable. That combination raises profit, since you’re generating more revenue than planned and spending less on operations than planned. For example, if budgeted revenue is 100 and actual revenue is 110, that’s a favorable revenue variance of 10. If budgeted operating costs are 50 and actual costs are 45, that’s a favorable cost variance of 5. The overall effect is a favorable total variance.