In standard cost accounting, a favourable cost variance occurs in which of the following situations?

Introduction / Context:
Standard costing and variance analysis are important tools in cost and management accounting. They involve setting standard costs for materials, labour, and overhead and then comparing these with actual costs. The differences are called variances and can be either favourable or unfavourable. Understanding when a variance is considered favourable is essential for interpreting cost reports and performance evaluations. This question asks about the situation in which a favourable cost variance arises.

Given Data / Assumptions:

• A standard cost is a planned or predetermined cost for a unit of input or output, set under normal conditions.
• Actual cost is the cost actually incurred during production.
• Variances are calculated as standard cost minus actual cost or using similar formulas depending on the convention.
• Output level is assumed to be the same when comparing standard and actual costs, so the comparison is fair.

Concept / Approach:
A favourable cost variance occurs when actual costs are lower than the standard costs allowed for the actual level of output. This means that the firm has spent less than expected to produce a given quantity of goods or services, which is generally positive for profitability. Conversely, if actual costs exceed standard costs, the variance is unfavourable, indicating higher than expected spending or inefficiency. If actual and standard costs are equal, the variance is zero, neither favourable nor unfavourable.

Step-by-Step Solution:
Step 1: Recall that the purpose of standard costing is to set target costs and then compare them with actual performance.Step 2: Recognise that a favourable variance is one that improves profit relative to expectation, while an unfavourable variance reduces profit relative to expectation.Step 3: If standard cost per unit is greater than actual cost per unit, the firm is saving money compared with the plan, which is favourable.Step 4: Apply this idea to the options. Option a states that actual cost incurred is less than the standard cost allowed for actual output, which is consistent with a favourable variance.Step 5: Option b describes a situation where actual cost is higher, which would be an unfavourable variance.Step 6: Option c describes zero variance, not a favourable one, and options d and e do not involve a meaningful comparison and therefore do not define a favourable variance.

Verification / Alternative check:
Cost accounting texts usually define cost variance as standard cost minus actual cost. Under this convention, a positive result (standard greater than actual) is labelled favourable, whereas a negative result (standard less than actual) is unfavourable. Examples show that when material or labour is acquired or used at a lower cost than standard, a favourable variance is recorded, indicating efficiency or favourable price movements. This confirms that option a is the correct description.

Why Other Options Are Wrong:
When actual cost exceeds standard cost, the firm spends more than planned, resulting in an unfavourable variance, so option b is incorrect. When actual cost equals standard cost, the variance is zero, so it is neither favourable nor unfavourable, making option c incorrect. Options d and e describe situations where variance analysis either cannot be performed or is not performed, so they do not define a favourable variance at all.

Common Pitfalls:
Some learners confuse the sign of the variance because different teaching materials define variance formulas differently. A simple way to avoid confusion is to focus on whether the actual cost outcome is better or worse than the plan from the firm perspective. Spending less than planned for the same output is favourable because it increases profit margin, while spending more is unfavourable. Keeping this interpretation in mind helps in answering such questions correctly.

Final Answer:
A favourable cost variance occurs when the actual cost incurred is less than the standard cost allowed for the actual output.