Study guide
7.3 Calculating Variances: Totals, Adverse or Favourable, and Percentages
AAT Level 2 Principles of Costing PCTN
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1 Introduction
About the AAT Principles of Costing (PCTN) Assessment
2 Chapter 1: The Cost Accounting Framework
1.1 Purpose and Role of Cost Accounting 1.2 Cost Accounting versus Financial Accounting 1.3 Responsibility Accounting and Cost Centres
3 Chapter 2: Cost Recording, Sourcing, and Coding
2.1 Cost Units and Cost Objects 2.2 Cost Coding Systems and Principles 2.3 Source Documentation and Cost Data Collection
4 Chapter 3: Cost Classification, Behaviour and the Manufacturing Account
3.1 Cost Classification by Element, Nature, and Function 3.2 Cost Behaviour Patterns and Analysis 3.3 Product Costs, Period Costs and the Manufacturing Account
5 Chapter 4: Inventory Valuation and Control
4.1 Inventory Records and Control Procedures 4.2 FIFO and LIFO Inventory Valuation 4.3 AVCO Inventory Valuation and Method Comparison
6 Chapter 5: Labour Costing and Remuneration
5.1 Labour Remuneration: Time Rates, Basic Pay, and Overtime 5.2 Piecework Systems and Incentive Schemes 5.3 Labour Cost Accounting, Idle Time, and Payroll On-Costs
7 Chapter 6: Overheads and Overhead Absorption
6.1 Overheads: Collection, Allocation and Apportionment (Background) 6.2 Overhead Absorption Rates: Per Unit, Per Labour Hour and Per Machine Hour
8 Chapter 7: Budgeting and Variance Analysis
7.1 Budgetary Planning, Principles, and Functional Budgets 7.2 Fixed versus Flexed Budgets 7.3 Calculating Variances: Totals, Adverse or Favourable, and Percentages 7.4 Variance Investigation, Causes, and Management by Exception
9 Chapter 8: Product and Service Costs, and Spreadsheet Tools
8.1 Product Cost Build-Up and Mark-Up versus Margin 8.2 Costing Services: Calculating Costs in Service Organisations 8.3 Entering and Formatting Data in Spreadsheet Tasks 8.4 Writing Costing Formulas the Way AAT Credits Them
7.3 Calculating Variances: Totals, Adverse or Favourable, and Percentages
Key Takeaways Explain This Topic AI
A cost variance is favourable when actual cost is below budget and adverse when actual cost is above budget.
An income variance is favourable when actual revenue exceeds budget and adverse when actual revenue falls short of budget.
Variance percentage equals the variance divided by the budgeted figure, multiplied by 100; the actual figure is never the denominator.
PCTN requires total variances for materials, labour, overheads and income against a fixed budget, not price, usage, rate or efficiency sub-variances.
Line variances should reconcile to the difference between budgeted and actual profit, which is a useful arithmetic check.
Last updated: September 2026
7.3 Calculating Variances: Totals, Adverse or Favourable, and Percentages
Key Concept: A variance is the difference between a budgeted figure and the actual result. PCTN asks you to compare actual results with a fixed budget for a single product and then do four things: calculate the total variance for materials, labour, overheads and income, label each one adverse or favourable , express it as a percentage of the budgeted figure , and decide which variances are significant enough to report.
The PCTN specification (learning outcome 3.1) requires you to understand how to decide whether a variance is adverse or favourable. It also requires you to calculate variances between actual and budgeted total materials, total labour, total overheads and total income , and to express each variance as a percentage of the budgeted cost or income. In AAT's review of the October 2023 examiner reports, "budget calculations and exception reporting using formulas" was one of the three weakest PCTN tasks, so this section is worth practising until it is automatic.
Adverse or Favourable?
A variance is described by its effect on profit :
- Line Actual compared with budget Effect on profit Label
- Cost (materials, labour, overheads) Actual less than budget Profit higher than planned Favourable (F)
- Cost Actual more than budget Profit lower than planned Adverse (A)
- Income (sales revenue) Actual more than budget Profit higher than planned Favourable (F)
- Income Actual less than budget Profit lower than planned Adverse (A)
Always ask "did this line make profit better or worse than planned?" Students who try to memorise "higher is adverse" get income variances wrong, because higher income is good news.
In a variance report the variance is normally shown as a positive amount with a label . For example, write "£2,880 A". Do not write "−£2,880", unless a task specifically asks for a signed figure.
The Variance Percentage
The percentage tells management how big the variance is relative to what was planned: Variance % = Variance Budgeted figure × 100 \text{Variance \%} = \frac{\text{Variance}}{\text{Budgeted figure}} \times 100 Variance % = Budgeted figure Variance × 100
The denominator is always the budgeted figure, never the actual figure. A £900 overspend on a £3,000 budget (30%) is far more alarming than a £900 overspend on a £90,000 budget (1%), and the percentage makes this visible at a glance. Round as the task instructs, commonly to the nearest whole percentage or to one or two decimal places.
Worked Example: Pennine Pies Ltd
Pennine Pies Ltd makes one product, a boxed steak pie. Its fixed budget and actual results for March are below.
- Line Budget £ Actual £ Variance £ A/F Variance % of budget
- Sales revenue 120,000 126,000 6,000 F 5.0%
- Direct materials 36,000 38,880 2,880 A 8.0%
- Direct labour 28,000 27,160 840 F 3.0%
- Fixed overheads 18,000 19,800 1,800 A 10.0%
- Total costs 82,000 85,840 3,840 A 4.7%
- Profit 38,000 40,160 2,160 F 5.7%
Working through each line:
Sales revenue: actual £126,000 is £6,000 more than budget. More income means more profit, so the variance is favourable. £6,000 ÷ £120,000 × 100 = 5.0% .
Direct materials: actual £38,880 is £2,880 more than budget, so the variance is adverse. £2,880 ÷ £36,000 × 100 = 8.0% .
Direct labour: actual £27,160 is £840 less than budget, so the variance is favourable. £840 ÷ £28,000 × 100 = 3.0% .
Fixed overheads: actual £19,800 is £1,800 more than budget, so the variance is adverse. £1,800 ÷ £18,000 × 100 = 10.0% .
Total costs: £85,840 − £82,000 = £3,840 adverse, which is 4.68% of budget (4.7% to one decimal place).
Profit check: £6,000 F − £2,880 A + £840 F − £1,800 A = £2,160 F, which agrees with £40,160 − £38,000. Always do this cross-check. If the profit variance does not reconcile, one of the line variances has the wrong label.
Setting the Calculation Out in a Spreadsheet
PCTN often asks for these calculations as spreadsheet formulas. Suppose the budget for direct materials is in cell B5, the actual figure in C5, the variance in D5 and the percentage in E5:
- Cell Purpose Formula
- D5 Materials variance (actual is higher, so actual minus budget gives a positive amount) =C5-B5
- E5 Variance as a percentage of budget =D5/B5 (cell formatted as a percentage)
- D4 Revenue variance (actual is higher, so actual minus budget) =C4-B4
- D6 Labour variance (budget is higher, so budget minus actual) =B6-C6
Choose the order of subtraction that gives a positive variance, then add the A or F label in the adjacent column. Section 8.4 explains the formula formats that AAT will and will not credit.
Why PCTN Uses a Fixed Budget, and Its Limitation
At this level, variances are calculated against the fixed budget , which was set for one planned level of activity. If actual output differs from planned output, part of each cost variance is simply caused by making more or fewer units. For example, if Pennine Pies made 5% more pies than planned, some of the £2,880 adverse materials variance would be expected. Section 7.2 explains how a flexible (flexed) budget removes that volume effect. PCTN requires you to understand the difference between the two budgets. Its calculation tasks, however, compare actual results with the fixed budget.
Beyond PCTN: Sub-Variances
Standard costing systems split each total variance further. A total materials variance can be split into a price variance and a usage variance, and a total labour variance into a rate variance and an efficiency variance. These splits are not part of the PCTN specification, which asks for total variances. They are useful background when you explain causes in a variance report, though. For example, if a total materials variance is adverse, the cause could be that more material was used, that a higher price was paid, or both.
Common Exam Traps
Labelling income variances backwards. Actual income above budget is favourable.
Dividing by the actual figure. Variance percentages use the budgeted figure as the denominator.
Netting different lines together. Report each line separately. A favourable labour variance does not cancel an adverse materials variance in the line-by-line report.
Ignoring rounding instructions. If the task says "to the nearest whole percentage", enter 8, not 8.0 or 7.99.
Forgetting the profit cross-check. The line variances should reconcile to the difference between budgeted and actual profit.