The reason we use the words favorable and unfavorable when evaluating variances is made clear when we look at the closing of accounts. To see this, consider that (1) all variance accounts are closed at the end of each period (temporary accounts), (2) a favorable variance is always a credit balance, and (3) an unfavorable variance is always a debit balance. Write a half-page memorandum to your instructor with three parts that answer the following three requirements. (Assume that variance accounts are closed to Cost of Goods Sold.) Required 1. Does Cost of Goods Sold increase or decrease when closing a favorable variance? Does gross margin increase or decrease when a favorable variance is closed to Cost of Goods Sold? Explain. 2. Does Cost of Goods Sold increase or decrease when closing an unfavorable variance? Does gross margin increase or decrease when an unfavorable variance is closed to Cost of Goods Sold? Explain. 3. Explain the meaning of a favorable variance and an unfavorable variance.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
The reason we use the words favorable and unfavorable when evaluating variances is made
clear when we look at the closing of accounts. To see this, consider that (1) all variance accounts are
closed at the end of each period (temporary accounts), (2) a favorable variance is always a credit balance,
and (3) an unfavorable variance is always a debit balance. Write a half-page memorandum to your instructor
with three parts that answer the following three requirements. (Assume that variance accounts are
closed to Cost of Goods Sold.)
Required
1. Does Cost of Goods Sold increase or decrease when closing a favorable variance? Does gross margin
increase or decrease when a favorable variance is closed to Cost of Goods Sold? Explain. 2. Does Cost of Goods Sold increase or decrease when closing an unfavorable variance? Does gross
margin increase or decrease when an unfavorable variance is closed to Cost of Goods Sold? Explain.
3. Explain the meaning of a favorable variance and an unfavorable variance.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
