Chapter 23, Problem 7BTN

To determine

Introduction:

Variance Analysis

• Variances are the difference between the budgeted values and actual values of the cost and revenue items and are analyzed for components of direct and indirect costs.

• In case of costs, the change is deemed unfavorable if the actual costs exceed the budgeted costs and the change is deemed favorable if the actual costs do not exceed the budgeted costs.

• In case of revenues, the change is deemed favorable if the actual revenues exceed the budgeted revenues and the change is deemed unfavorable if the actual revenues are less than the budgeted revenues.

Standard Costing:

• It is a cost estimation and analysis where the standard costs for variable components such as material, labor and overheads and for fixed costs such as depreciation, administrative expenses etc. are calculated for a fixed quantity of goods.

• The calculations for the estimated goods to be produced is considered and compared against the actual cost components and the differences are analyzed through variance analysis of measures such as price variance analysis, efficiency variance etc.

• Favorable variances have a positive impact on the costs and profitability and the unfavorable variances have an adverse impact on costs and profitability.

To Determine:

Interpretation of the statements “Variances are not explanations” and “Management’s Goal is not to minimize variances”