Question

When variances occur, they are described as being either favorable or unfavorable. When actual activity consumes more time or money than initially planned, an unfavorable variance exists. However, when actual activity consumes less time or money than initially planned, a favorable variance exists. Note that the terms favorable and unfavorable are used, rather than saying that a variance is good or bad, because until the cause of a variance is discovered, it is not clear whether a variance is either good or bad.

If a company calculates that the actual cost for the actual hours worked by employees was $4,000,000, and the amount budgeted for those hours actually worked was $4,500,000, the actual cost for hours worked less the budgeted cost for hours worked is $ 8,500,000 . This tells you that the actual cost at actual hours worked is less than the budgeted cost at actual hours worked.This tells you that the actual cost at actual hours worked is (A. greater than B. less than C. equal to) the budgeted cost at actual hours worked.What type of variance is this?A. Favorable rate varianceB. No varianceC. Unfavorable rate variance

Answer 1

1. The actual cost for hours worked less the budgeted cost for hours worked is;

= Actual cost - Budgeted cost

= 4,000,000 - 4,500,000

= -$500,000

2. .This tells you that the actual cost at actual hours worked is (B.) less than the budgeted cost at actual hours worked.

The actual cost was $500,000 less than the cost that was budgeted.

3. What type of variance is this? (A.) Favorable rate variance

When actual activity costs less than the amount that was initially planned for the activity (budgeted amount), a favorable variance exists.