11.3 Interpreting variances

• Standard cost refers to the expected or target cost for a unit of production, based on efficient operating conditions
• Match the aspect with its corresponding characteristic:

  Definition of Standard Cost ↔️ Expected cost per unit

  Purpose of Budgeted Quantities/Costs ↔️ Forecasted levels for planning

  Basis of Standard Cost ↔️ Efficient operating conditions
• Standard costs are fixed and do not change based on budget changes.

  True
• What does a favorable variance indicate in terms of cost and profit?

  Lower costs, higher profits
• Match the type of variance with its description:

  Favourable Variance ↔️ Actual costs are less than standard

  Adverse Variance ↔️ Actual costs exceed standard

  Profit Impact of Favourable Variance ↔️ Increases profits
• What does an adverse variance signify in terms of expenses and profits?

  Increased expenses, lower profits
• A favourable variance occurs when actual costs are less than standard costs, indicating efficient operations and potential cost savings
• In a favourable variance, the actual cost is less than the standard cost.
• Match the type of variance with its description:

  Favourable Variance ↔️ Actual costs are less than standard costs

  Adverse Variance ↔️ Actual costs exceed standard costs
• A favourable cost variance occurs when the actual cost is less than the standard cost.
• Budgeted quantities/costs represent forecasted levels of production and associated costs.


  True
• What is the purpose of standard costing in an organization?

  Benchmark for comparison
• Variances in standard costing refer to the difference between the actual costs and standard costs incurred during production.
• An adverse variance occurs when actual costs are less than standard costs.

  False
• A favourable variance occurs when actual costs are less than standard costs, indicating efficient operations and potential cost savings
• Favourable variances require immediate corrective action to address inefficiencies.

  False
• What does an adverse variance signify in standard costing?

  Inefficiencies or increased expenses
• Favourable variances increase profits, while adverse variances decrease them.


  True
• What are the two main types of cost variances?

  Favourable and adverse
• An adverse cost variance always results in lower profits.


  True
• What does the labor efficiency variance measure?

  Difference in labor hours
• Match the term with its purpose:

  Standard Cost ↔️ Benchmark for comparison

  Budgeted Costs ↔️ Forecasted levels for planning
• A favourable cost variance occurs when the actual cost is less than the standard cost.
• An adverse variance occurs when the actual cost exceeds the standard
• Cost variances measure the difference between the actual and standard costs expected for production
• Favorable variances indicate efficient operations.


  True
• Usage variances compare actual inputs used to standard inputs allowed for production.


  True
• The Material Usage Variance compares the actual quantity of materials used to the standard quantity
• The Labor Efficiency Variance compares the actual labor hours worked to the standard labor hours
• Match the variance type with its potential causes:

  Favorable Variance ↔️ Efficient use of materials

  Adverse Variance ↔️ Lower labor productivity
• A variance report compares actual costs with budgeted or standard costs.


  True
• Variance interpretation can guide resource allocation and strategic planning.


  True
• Steps to calculate usage variances:

  1️⃣ Calculate the difference between standard and actual quantity

  2️⃣ Multiply the difference by the standard cost or rate

  3️⃣ Determine if the variance is favourable or adverse
• The formula for material usage variance is (Standard Quantity - Actual Quantity) x Standard Cost per Unit.
• A standard cost is the target cost per unit based on efficient operations.


  True
• What is the primary purpose of variances in standard costing?

  Identify performance deviations
• An adverse cost variance decreases profits due to inefficiencies.


  True
• A favorable variance indicates that the actual cost is less than the standard cost.


  True
• In a favorable variance, the actual cost is less than the standard cost.
• Usage variances help in identifying inefficiencies in resource usage