CA Intermediate · Cost and Management Accounting · Standard Costing
Which of the following best describes a 'favourable' variance in standard costing?
A favourable variance arises when actual cost is lower than the standard cost allowed for the actual output, or when actual profit or sales exceed standard. It improves profit compared with the standard, whereas an adverse variance reduces profit.
- AActual cost is lower than standard cost for the actual output, or actual revenue/profit is higher than standardCorrect
- BActual cost exceeds standard cost for the actual output
- CActual output is lower than budgeted output
- DActual cost equals standard cost
Explanation
A favourable variance increases profit relative to standard: actual cost is below the standard allowed for actual output (or actual sales/profit are above standard). The second option describes an adverse variance. Option three is a volume shortfall and option four is zero variance.
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