Accountants often use negative amounts to indicate an unfavorable variance. For instance, if actual revenues are less than the budgeted revenues, the variance (or difference) will be shown as a negative amount. The reason is that having less revenues than planned is not good. On the other hand, if actual expenses are less than the budgeted amount of expenses, the variance will be shown as a positive amount. The reason is that fewer actual expenses than budgeted is favorable (or good, positive).
Let's illustrate this further with an example. Assume that a company had the following actual amounts in a recent week: revenues $750, expenses $525, net income $225. For the same week, the company had budgeted the following amounts: revenues $900, expenses $700, net income $200. The comparison of actual to budget resulted in the following variances:
- Revenues variance: unfavorable $150. Presented as (150).
- Expenses variance: favorable $175. Presented as 175.
- Net income variance: favorable $25. Presented as 25.
The net income variance is favorable because the favorable expense variance was $25 greater than the unfavorable revenues variance. The favorable $175 variance exceeded the unfavorable $150 variance resulting in the net variance of $25 favorable.
Our example shows that the positive and negative signs for the variances are logical if you focus is on the company's net income. In other words, ask yourself one of the following questions:
- "Is the difference between the actual and the budgeted amounts good or bad as far as the company's net income?"
- "Is the variance favorable or unfavorable as far as the company's net income?"
- "Does the difference have a positive or negative effect on the company's net income?"
To assist others, it may be helpful to indicate on your report "( ) = an unfavorable effect on net income."