Generally a cost variance is the difference between a cost's actual amount and its budgeted or planned amount. For example, if a company had actual repairs expense of $950 for May but the budgeted amount was $800, the company had a cost variance of $150. Since the actual cost was more than the budgeted amount, the cost variance is said to be unfavorable. When an actual cost is less than the budgeted amount, the cost variance is said to be favorable.
Cost variances are a key part of the standard costing system used by many manufacturers. In such a system the cost variances explain the difference between 1) the standard, predetermined and expected costs of the good output, and 2) the actual manufacturing costs incurred. These cost variances send an early signal to management that the company is experiencing actual costs that are different from the company's plan. Standard costing systems will report a minimum of two cost variances for each of the following manufacturing costs: direct materials, direct labor and manufacturing overhead.