when a manufacturing company uses a standard cost system, an unfavorable variance is a contra expense

Expert Solution

The thing that contra expense do is it reduces the amount of a particular expense. Since all the expense has debit nature, thus any item can reduce them only if it has a credit balance. Thus, from this we can gain an understanding that contra expense have credit balance.

Now, if we come to unfavourable variance, it is a type of loss for an organization if it has unfavourable variance, it may be unfavourable material cost variance or unfavourable labour cost variance and we know that anything causing loss to an organization have debit balance.

Now again from this we get an understanding that unfavourable variance have debit balance.

Now if we closely analyze first two paragraph we can easily conclude that since contra expense item have credit balance whereas unfavourable variance have debit balance, thus, unfavourable variance can never be a contract expense.

Conclusion :- if a manufacturing company uses a standard cost system, an unfavourable variance cannot be a contract expense.

ekkarill92 answered 2 years ago

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