The reason we use the words unfavorable and favorable when computing variances is made clear when we look at the closing of accounts. To see this, consider that: all variance accounts are closed at the end of every period (temporary accounts), a favorable cost variance is always a credit balance, and an unfavorable cost variance is always a debit balance.
Prepare a one page memorandum to your instructor with three parts that answers the three subsequent requirements.
Does Cost of Goods Sold decrease or increase when concluding a favorable variance? Does gross margin increase or decrease when a favorable variance is closed to Cost of Goods Sold? Describe.
Does Cost of Goods Sold decrease or increase when finishing an unfavorable variance? Does gross margin increase or decrease when an unfavorable variance is closed to Cost of Goods Sold? Describe.
Describe the meaning of a favorable variance and an unfavorable variance.