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What does a favorable variance indicate?

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Question: What does a favorable variance indicate?

Options:

  1. Costs are higher than budgeted
  2. Sales are lower than budgeted
  3. Costs are lower than budgeted or sales are higher than budgeted
  4. No impact on financial performance

Correct Answer: Costs are lower than budgeted or sales are higher than budgeted

Solution: 

A favorable variance indicates that actual costs are lower than budgeted or actual sales are higher than budgeted.

What does a favorable variance indicate?

Practice Questions

Q1
What does a favorable variance indicate?
  1. Costs are higher than budgeted
  2. Sales are lower than budgeted
  3. Costs are lower than budgeted or sales are higher than budgeted
  4. No impact on financial performance

Questions & Step-by-Step Solutions

What does a favorable variance indicate?
  • Step 1: Understand what a variance is. A variance is the difference between what was planned (budgeted) and what actually happened.
  • Step 2: Identify the two types of variances: cost variance (how much you spent) and sales variance (how much you earned).
  • Step 3: Know that a favorable variance means you did better than expected.
  • Step 4: For costs, a favorable variance means you spent less money than you planned.
  • Step 5: For sales, a favorable variance means you made more money than you planned.
  • Step 6: Conclude that a favorable variance is a good sign for a business.
  • Variance Analysis – Variance analysis is a financial management tool used to assess the difference between planned financial outcomes and actual financial outcomes.
  • Favorable Variance – A favorable variance occurs when actual performance exceeds expectations, either through lower costs or higher revenues.
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