# viariance - It suggests that the company paid too much for...

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One of the major management uses of standard costs is to identify variances from standards.  Variances  are the differences between total actual costs and total standard costs. To illustrate, we will assume that in producing 1,000 gallons of Weed-O in the month of June, Xonic,  Inc. incurred the following costs.  Illustration 22-8    Actual production costs Companies determine total standard costs by multiplying the units produced by the standard cost per  unit.  The total standard cost of Weed-O is \$42,000 (1,000 gallons × \$42). Thus, the total variance is  \$2,500, as shown below.  Illustration 22-9    Computation of total variance Note that the variance is expressed in total dollars, and not on a per unit basis.

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When actual costs exceed standard costs, the variance is  unfavorable The \$2,500 variance in June  for Weed-O is unfavorable.  An unfavorable variance has a negative connotation
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Unformatted text preview: . It suggests that the company paid too much for one or more of the manufacturing cost elements or that it used the elements inefficiently. If actual costs are less than standard costs, the variance is favorable . A favorable variance has a positive connotation. It suggests efficiencies in incurring manufacturing costs and in using direct materials, direct labor, and manufacturing overhead. However, be careful: A favorable variance could be obtained by using inferior materials. In printing wedding invitations, for example, a favorable variance could result from using an inferior grade of paper. Or, a favorable variance might be achieved in installing tires on an automobile assembly line by tightening only half of the lug bolts. A variance is not favorable if the company has sacrificed quality control standards....
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viariance - It suggests that the company paid too much for...

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