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Frequently Asked Questions
Favorable variances improve profit (actual cost less than standard, or actual revenue more than budgeted). Unfavorable variances reduce profit. However, "favorable" doesn't always mean "good"—a favorable materials quantity variance could mean lower quality or cutting corners.
Both have rate/price and efficiency/quantity components, but labor uses hours instead of units. Labor rate variance = (Actual rate - Standard rate) × Actual hours. Labor efficiency variance = (Actual hours - Standard hours) × Standard rate. The logic is identical to materials.
Overhead variances compare actual overhead to what should have been spent for the actual production level. Fixed overhead volume variance occurs when actual production differs from expected capacity. Variable overhead variances work like direct cost variances with rate and efficiency components.
Watch for: asking which manager is responsible (price vs. quantity), computing variances with missing data (you may need to solve for unknowns), interpreting whether to investigate, and understanding the direction (favorable vs. unfavorable). Always identify what's being compared to what.