Question

How often should variances be reported to management? Why? What principle may be used with variance reports?Explain.

What is the difference between a favorable cost variance and an unfavorable cost variance. Provide an example of each.

Answer 1

The variances should be reported to management monthly based on the monthly budget prepare by the accountant. This would help in early identification of issue to the management and take preventive steps for cases where there is large variance between budgeted and actual. The principle used in variance reports is comparison between standard rate with the actual rate to understand the deviation and the steps that needs to be taken.

Favorable cost variance means that the actual cost is less than the budgeted cost. Say for example if the company has budgeted cost of raw material to be $ 3000 and actual cost incurred was $ 2500, than it is favorable cost variance of $ 500 for the company.

Unfavorable cost variance means that the actual cost incurred is higher than the budgeted cost. Say for example the company has budgeted labor cost of $ 2000 and actual labor cost incurred is $ 3000, than it is unfavorable cost variance of $ 1000 for the company.