Final answer:
Cost variance for a project is calculated by subtracting the Earned Value (EV) from the Actual Cost (AC) with the formula CV = EV - AC. A positive cost variance indicates being under budget, and a negative one signifies being over budget. Understanding a firm's average variable cost relative to market price is critical for profit maximization.
Step-by-step explanation:
The cost variance for a project is calculated by subtracting the Earned Value (EV) from the Actual Cost (AC), represented by the formula CV = EV - AC. When interpreting cost variance, a positive value indicates the project is under budget, while a negative value suggests it is over budget.
In the context of production and cost analysis, when a firm's average variable cost of production is lower than the market price, the firm is considered to be earning profits if fixed costs are not considered. This scenario underlines the importance of understanding cost behaviors such as variable costs, fixed costs, and how they relate to total output and pricing strategies for a firm's products or services.
While not directly related to the original cost variance formula, understanding the behavior of average variable costs as being typically U-shaped is essential for businesses. It helps them identify the optimal level of output where the costs are minimized and potential profits are maximized.