Question

Which of the following statements is true?

1)Variances are the differences between total actual costs and total standard costs.
2)When actual costs exceed standard costs, the variance is favorable.
3)An unfavorable variance results when actual costs are decreasing but standards are not changed.
4)All of the above are true.

Answer 1

The first statement is true, stating that variances are the differences between total actual costs and total standard costs. The other two options are incorrect because an unfavorable variance arises when actual costs are higher than standard costs, not when they are lower or decreasing.

Step-by-step explanation:

Which of the following statements is true? Out of the options provided, the correct statement is: Variances are the differences between total actual costs and total standard costs. This means that variances can be favorable or unfavorable based on whether the actual costs are lower or higher than the standard costs respectively.

Therefore, the second and third statements in the question are incorrect. When actual costs exceed standard costs, the variance is unfavorable, not favorable. Additionally, an unfavorable variance occurs when actual costs are higher than the standards; simply a decrease in actual costs does not lead to an unfavorable variance unless it is still higher than the standard cost.

Understanding variances is vital for businesses as it allows them to see where they are exceeding or not meeting their financial expectations and to adjust accordingly. The breakdown of total costs into fixed cost, marginal cost, average total cost, and average variable cost provides various insights for a firm, allowing for better cost control and budgeting strategies.