Q1CA - Horngren'S Financial And Managerial Accounting

Question

In 75 words or fewer, explain what a cost variance is and describe its potential causes.

Step-by-Step Solution

Answer

Cost variance gauges how closely a business keeps its actual costs within the acceptable range.

Step 1: Meaning of Variance

The variance is the difference between the actual cost and the standard cost. The sum of the variance attributable to specific contingencies is shown by dividing the total cost variance into the different cost variances.

Step 2: Explaining cost variance

How successfully a corporation maintains the actual cost within the norm is measured by cost variance. The cost variance displays a favorable variation if the actual cost per unit is lower than the benchmark. The cost variance displays an unfavorable variation if the actual cost per unit is higher than the benchmark.

The formula to calculate Cost variance is as follows:

$\text{Cost\hspace{0.33em}variance}=\left(\text{Actual\hspace{0.33em}cost}-\text{Standard\hspace{0.33em}cost}\right)\times \text{Actual\hspace{0.33em}quantity}$