What is adverse variance?

What is adverse variance?

• A. Adverse variance occurs when the actual costs exceed the budgeted costs or actual revenue is less than budgeted revenue
• B. Adverse variance occurs when actual costs are less than budgeted costs
• C. Adverse variance occurs when actual revenue exceeds budgeted revenue
• D. Adverse variances do not exist in budgets

Answer: (A)

Adverse variance happens when actual results are worse than what was planned in the budget. It shows up when costs come in higher than budgeted or when revenue comes in lower than budgeted, which reduces profit. The statement that captures this precisely is: actual costs exceed budgeted costs or actual revenue is less than budgeted revenue. For example, spending more on materials than budget (costs overrun) or earning less than planned in sales (revenue shortfall) both produce adverse variances. In contrast, costs below budget or revenue above budget would be favorable variances, and if actual figures match the budget there’s no variance.

Adverse variance happens when actual results are worse than what was planned in the budget. It shows up when costs come in higher than budgeted or when revenue comes in lower than budgeted, which reduces profit. The statement that captures this precisely is: actual costs exceed budgeted costs or actual revenue is less than budgeted revenue. For example, spending more on materials than budget (costs overrun) or earning less than planned in sales (revenue shortfall) both produce adverse variances. In contrast, costs below budget or revenue above budget would be favorable variances, and if actual figures match the budget there’s no variance.