Memorandum for Managerial Accounting
The reason we use the words favorable and unfavorable when evaluating 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 each period (temporary accounts)
- A favorable cost variance is always a credit balance
- An unfavorable cost variance is always a debit balance
Write a one page memorandum to your instructor with three parts that answers the three following requirements. (Assume that variance accounts are closed to Cost of Goods Sold.) (Should be in the format of a memo)
- Does Cost of Goods Sold increase or decrease when closing a favorable variance? Does gross margin increase or decrease when a favorable variance is closed to Cost of Goods Sold? Explain.
- Does Cost of Goods Sold increase or decrease when closing an unfavorable variance? Does gross margin increase or decrease when an unfavorable variance is closed to Cost of Goods Sold? Explain.
- Explain the meaning of a favorable variance and an unfavorable variance.
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When the variance is favorable, the price of commodities is supposed to reduce since a company would have saved money it was expecting to spend. It will not have to increase its charges on commodities with an aim of attaining its targeted gains. The gross margin will, however, the rise in a reduction of expenses leads to a rise in gains. The profits that were…
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