If actual raw materials cost exceeds the budgeted raw materials cost, then the variance is a(n) (favorable/unfavorable) variance.

Understanding Variance

In budgeting and financial analysis, variance refers to the difference between what was expected (budgeted) and what actually occurred (actual costs).

Determining Favorable and Unfavorable Variances

1. Favorable Variance: Occurs when actual costs are less than budgeted costs. This indicates a positive scenario where expenditures are lower than anticipated, leading to higher profits or savings.

2. Unfavorable Variance: Occurs when actual costs exceed budgeted costs. This situation indicates a negative outcome where expenditures are higher than expected, potentially leading to reduced profits or increased losses.

Conclusion

In the scenario presented, since the actual raw materials cost exceeds the budgeted raw materials cost, this results in an unfavorable variance. This implies that the company has spent more on raw materials than initially planned, which can negatively impact overall profitability.