When would a variance be labeled as favorable? A. When standard costs are less than actual...

When would a variance be labeled as favorable?

A. When standard costs are less than actual costs

B. When estimated costs are greater than actual costs

C. When actual costs are less than standard costs

D. When standard costs are equal to actual costs

Expert Solution

The Correct answer is C - When actual costs are less than standard costs.

Actual Costs - These costs are incurred by the company while performing day to day operations.

Standard Costs - These are the estimates of cost that would be incurred while manufacturing a product or while providing services. Standard costs are predetermined. These costs are used in estimating future income of a company.

Whenever Actual costs would be lower than Standard costs the variance will be Favorable.

A company usually sets the standard cost before entering into actual production process. Therefore the company sets what the future costs should be so that their financial planning can be achieved. However the actual costs would be those costs that would actually incur during the production process. It may be higher or lower as compared to the Standard Cost. When Actual costs will be less than Standard cost it would mean that company has actually saved on cost. The company was expecting cost to be higher but in actual they were lower as compared to their estimates. Thereby resulting into a Favorable Variance.

Thus it can be concluded that when actual costs are less than standard costs a variance would be labeled as favorable.

ekkarill92 answered 1 year ago

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