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How do increases in costs effect on variance analysis? List the types of variances affected &...

How do increases in costs effect on variance analysis? List the types of variances affected & specify the (positive or negative) impact.

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Expert Solution

Increase in costs means Increase inthe actual cost incurred. If the Actual cost incurred increases as compared to standard cost budgeted for the task, it causes an unfavorable variance. For example, Let's say Company X used B as raw material. Suppose B's cost per kg has been budgeted as $5 per kg for whole year.

In First quarter, company buys B at a price of $4.5 per kg which is less than the budgeted price. It will create a favorable variancefor Q1.

In 2nd Quarter, due to sudden increase in price of materials, B is costing $5.8 per kg. Now, the cost has gone up. Since Budgeted Price is $5 per kg and the actual price is $5.8, it will cause an unfavorable variance in Material Price Variance.

Similar example can be drawn for Labor, Overheads etc.

Types of Variance affected due to increase in cost are:

- Material Price Variance (due to increase in price of raw matrerial) : Unfavarabole due to increase in cost

- Labor rate variance (due to increase in labor rate) Unfavarabole due to increase in cost

- Variable Overhead Expenditure Variance (Overheads incurred above the required) Unfavarabole due to increase in cost

ekkarill92 answered 1 year ago
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