Question

For each variable product cost, there are two variances. What does each measure? (Hint: Look for patterns in them. There are two fundamental aspects of financial performance measured.)

Explain for easy understand. Thanks

Answer 1

Solution:

For each variable product cost, there are two variances as under:

1. Rate variance - This variance measures difference in cost due to difference in standard rate and actual rate of relvent variable product cost. If standard rate if higher than actual rate then cost is lesser than standard and will result in favorable variance. If actual rate if higher than standard rate then it will result in unfavorable rate variance

2. Quantity / Efficiency variance - This variance measure difference in cost due to difference in standard quantity for actual production and actual quantity used. If actual quantity consumed is higher than standard quanttity then it will result in unfavorable quantity variance. If actual quantity consumed is lesser than standard quantity then it will result in favorable quantity variance.