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Please discuss how variances between standard and actual costs/hours/quantities occur, and identify what a FAVORABLE variance...

Please discuss how variances between standard and actual costs/hours/quantities occur, and identify what a FAVORABLE variance is versus an UNFAVORABLE variance. Give examples.

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Answer #1

Variances can be understood as 'differences' or diversion from a standard.

Certain standards are set for production process regarding cost, quantities, hours that should be incurred, or used during process. The Actual production results however could either be more than standard set or lower than the standard set.

With respect to cost, quantities and hours, if actuals are more than what the standards are, there is a VARIANCE and its an Unfavourable Variance.

If actuals are lower than the standards being set, the Variance is a FAVOURABLE Variance.

Example of Favourable variance - (total cost)
Eg 1: 1 unit is produced at $10. Actual output say is 10000 units costing $110000.
Now, standards are that 1 unit will cost $10, hence, 10000 units should have cost $100000 [10000 x 10]
Actual cost is more than Standard and hence there is a $10000 UnFavourable Variance.

Eg 2: 1 unit to produce will take 8 hours $ 2 per hour. Hence total labor cost will be $16 per unit.
In actual, 10000 units are produced and 75000 hours were taken at @2.1 per hour. Hence total actual Labor cost = 75000 x 2.1 = $157500.

Standard cost of labor for 10000 units would be 10000 units x $16 = $160000
Actual cost of labor is $157500.
Hence, there is a $2500 of FAVOURABLE variance, since actual cost is less than standard cost.

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