Identify the type of variance indicated by each of the following situations and indicate whether...

Question:

Identify the type of variance indicated by each of the following situations and indicate whether it is favorable or unfavorable: 1. The cutting department of a company during the week ending July 15 cut 12 size-S cogged wheels out of three sheets of 12-inch high-tempered steel. Usually three wheels of such size are cut out of each sheet. 2. A company purchased and installed an expensive new cutting machine to handle expanding orders. This purchase and the related depreciation had not been anticipated when the overhead was budgeted. 3. Edwards, the band saw operator, was on vacation last week. Lands took her place for the normal 40-hour week. Edwards? wage rate is $12 per hour, while Lands? is $10 per hour. Production was at capacity last week and the week before.

Variance Analysis

In budgeting, a variance is the difference between actual and budgeted costs and quantity. It also measures the firm's efficiency to keep the budget as forecasted to minimize costs while maximizing profit.

Answer and Explanation: 1

1. The cutting department of a company during the week ending July 15 cut 12 size-S cogged wheels out of three sheets of 12-inch high-tempered steel. Usually three wheels of such size are cut out of each sheet.

Material Usage Variance. Favorable

2. A company purchased and installed an expensive new cutting machine to handle expanding orders. This purchase and the related depreciation had not been anticipated when the overhead was budgeted.

Fixed Overhead Expenditure Variance. Unfavorable

3. Edwards, the band saw operator, was on vacation last week. Lands took her place for the normal 40-hour week. Edwards? wage rate is $12 per hour, while Lands? is $10 per hour. Production was at capacity last week and the week before.

Labor Rate Variance. Unfavorable


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Variance Analysis Model in Accounting

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Chapter 6 / Lesson 6

Variance analysis modeling tracks the changes or trends of different costs over time to better inform budgeting decisions. Learn how this model can be used with direct materials, direct labor, and overhead variances.


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