Question

Strongheart enterprises anticipated selling 27,000 units of a major product and paying sales commissions of $6 per unit. actual sales and sales commissions totaled 27,500 units and $171,400, respectively. if the company used a flexible budget for performance evaluations, strongheart would report a cost variance of:

Answer 1

Cost variance is $6,400 unfavorable

Step-by-step explanation:

Cost variance shows that how much under/over valued is the budget. It measures the difference of the actual cost incurred and the budgeted cost.

Earned value is the value of budgeted cost which is calculated using actual activity. It is the cost that should be incur on budgeted units.

Earned value can be calculated as follow:

Earned value = Actual Activity x Budgeted rate = $27,500 x $6 = $165,000

Formula for cost variance is as follow

Cost Variance = Earned Value - Actual Value

Cost Variance = $165,000 - $171,400

Cost Variance = -$6,400

It is an unfavorable variance because company incurred more cost than it should be.