We have learned about Standard costs and associated variances in this chapter. Can a favorable variance...

We have learned about Standard costs and associated variances in this chapter. Can a favorable variance be a bad thing? Describe a realistic scenario where a favorable variance could be detrimental(have unwanted consequences elsewhere in the business).

Solutions

Expert Solution

Yes a favourable variance can be a bad thing for the business on overall basis

A case of material cost variance is explained below

Scenario

Let us a take a case of raw material purchase for a business. Suppose if a new vendor is evaluated for purchase of raw material at a lower price it will result in favourable purchase price variance for the business. But if the material is of inferior quality compared to existing material used in production it can lead to issues in production like more re-work and scrap generation which in turn will decrease the efficiency and consume more material. This will lead to Material efficiency variance being adverse for the business. Hence overall at the firm level there might be higher adverse material cost variance due to material efficiency variance being adverse. The adverse variance caused by the material usage is higher than the price variance benefit received due to new vendor supplies. Hence the firm needs to be careful in evaluation of new suppliers and ensure enough trial runs are taken with new material to ensure production efficiency is not hampered.

ekkarill92 answered 2 months ago

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