Is a favorable variance always an indicator of efficiency in operation?
In a standard costing system, some favorable variances are not indicators of efficiency in operations. For example, the materials price variance, the labor rate variance, the manufacturing overhead spending and budget variances, and the production volume variance are generally not related to the efficiency of the operations.
On the other hand, the materials usage variance, the labor efficiency variance, and the variable manufacturing efficiency variance are indicators of operating efficiency. However, it is possible that some of these variances could result from standards that were not realistic. For example, if it realistically takes 2.4 hours to produce a unit of output, but the standard is set for 2.5 hours, there should be a favorable variance of 0.1 hour. This 0.1 hour variance results from the unrealistic standard, rather than operational efficiency.
Learn more about Standard Costing and work our free puzzles on standard costing.
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When you say a favourable budget variance,first you read meaning to the word favourable.Now to me,favourable simply mean a success or a gain.combining them together,we now see that the total amount budgeted for a specific task is not up to the expenses made.meaning after the project has been executed,some amount of money still remains.