AquaCool produces and sells premium bottled water sourced from natural springs.

The flexible budget for direct material cost is $24,000.

The actual direct material cost is $25,000.

Is the flexible budget variance for direct material favourable or unfavourable?

Question

AquaCool produces and sells premium bottled water sourced from natural springs.

The flexible budget for direct material cost is $24,000.

The actual direct material cost is $25,000.

Is the flexible budget variance for direct material favourable or unfavourable?

BlackTom AI · Accepted Answer

Question and options being considered: AquaCool produces and sells premium bottled water sourced from natural springs. The flexible budget for direct material cost is $24,000. The actual direct material cost is $25,000. Is the flexible budget variance for direct material favourable or unfavourable?

Option 1: Favourable
In a flexible budgeting context, a variance is favourable when actual costs are less than the flexible budget or when actual revenues exceed budgeted amounts. Here, the actual direct material cost ($25,000) is higher than the flexible budget amount ($24,000). Since costs have exceeded the budget, this would not be considered favourable; it represents overspending relative to the flexible plan.

Option 2: Unfavourable
An unfavourable variance occurs when actual costs surpass the budgeted (flexible budget) amount, increasing costs versus what was planned. The given data show actual direct material cost is $25,000 against a flexible budget of $24,000, a $1,000 unfavorable difference. This aligns with the standard definition of an unfavourable variance, indicating overspending on materials.

Why one would choose the unfavourable explanation over the favourable one: the key criterion is the direction of deviation from the budget. Since the cost went up by $1,000 relative to the flexible budget, the result is a cost overrun, which is undesirable in budgeting terms. The favourable option incorrectly treats the relation as a cost reduction, which would require actual costs to be less than $24,000, not more.

Additional nuance: remember that a variance can be assessed in terms of cost control rather than absolute magnitude alone. A $1,000 overspend on direct materials might be small or large depending on the total budget, but by definition relative to the flexible budget, it is unfavourable because it worsens the cost outcome compared to the plan.

In summary, option 2 (Unfavourable) correctly reflects that the actual direct material cost exceeded the flexible budget, producing an unfavorable variance, whereas option 1 (Favourable) would only be correct if actual costs were below the flexible budget.

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AquaCool produces and sells premium bottled water sourced from natural springs. The flexible budget for direct material cost is $24,000. The actual direct material cost is $25,000. Is the flexible budget variance for direct material favourable or unfavourable?

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