If the actual cost or revenue contributes to a lower income than the budgeted amount, the variance is considered

• A. Favorable
• B. Unfavorable
• C. Neutral
• D. Undesirable

Answer: (B)

In budgeting and variance analysis, you compare actual results to what was planned. A variance is favorable when actual results improve net income relative to the budget, and unfavorable when they worsen it. If the actual cost comes in higher than planned or actual revenue comes in lower than planned, net income ends up being lower than the budget, so the variance is unfavorable. For example, revenue below budget reduces income, or costs above budget increase expenses, both leading to a worse-than-budgeted result. The term favorable wouldn’t apply in this situation, neutral would only occur if actual results exactly matched the budget, and “undesirable” isn’t the standard term used in variance reporting.