What is considered an adverse variance in performance management?

An adverse variance occurs when actual performance is worse than what was anticipated or budgeted. This is significant in performance management as it indicates a potential issue that needs to be addressed. For example, if a company's actual cost of production exceeds the budgeted cost, this results in an adverse variance, signaling inefficiencies or unexpected expenses that can negatively impact profitability.

Recognizing adverse variances is crucial because they prompt management to investigate the underlying causes, which may include increased material costs, labor inefficiencies, or lower-than-expected sales. Addressing these variances allows businesses to adjust their operations, control costs, and improve overall performance.

In contrast to adverse variance, situations where results exceed expectations would be considered favorable. Irrelevant variances do not provide guidance for decision-making because they do not impact financial outcomes. High profit margins indicate positive performance, rather than a variance scenario. Thus, identifying and addressing adverse variances is essential for effective performance management.