Q1RQ - Horngren'S Financial And Managerial Accounting

Question

What is a variance?

Step-by-Step Solution

Answer

Answer

The discrepancy between a predicted and actual sum is known as a variance.

Step 1: Meaning of Variance

A variance is a difference between an expected sum and the actual sum. Budgeting frequently involves adjustments, but every forecast will see some variability. When making a prediction, one may consistently have a favorable or unfavorable variance.

Step 2: Explaining the variance

A variance's magnitude can be changed by changing the baseline on which it is based. For instance, the purchasing manager can advocate for a high baseline cost to produce favorable materials buy price differential. Due to the high standard, purchasing anything at a lower price is simple, producing beneficial results for the variance calculation. The creation of variations should therefore be strictly regulated.

Numerous potential deviations might be reported to management; therefore, the person providing this information should be informed only to send those variances that management can act to fix. There is less need to disclose the information if a deviation is trivial or cannot be fixed in the future.