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Cost of Goods Sold & Favorable Variance: Aviation Industry Case Study

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Updated: Jun 30th, 2022

Introduction

Companies related to the aviation industry need to monitor variances associated with their operations and external factors. These companies should pay attention to labor variances, focusing on the rate and efficiency variances, as well as labor cost variances to retain the workforce and address the consumer demand. Labor variances can depend on the direct labor hours, capacity, and costs associated with the staff’s work during high and low seasons. Material variances are also associated with changes in the price and quantity of the produced equipment or proposed services. It is also necessary to focus on the overhead variances related to the spending, volume, and efficiency (Variance analysis in airlines, 2008). Airlines should predict changes in costs and refer to variances influenced by exchange rates, changes in commissions, and traffic rates because they affect the processes of budgeting costs and completing the labor and material variance analysis in the aviation industry.

Assignment: Case Study

To: XXX

From: XXX

Date: May 7, 2016

Subject: The Favorable and Unfavorable Variances’ Impact on Cost of Goods Sold

While discussing the interdependence between Cost of Goods Sold and the favorable variance, it is important to note that Cost of Goods Sold is inclined to decrease when it is necessary to close the favorable variance. In this case, the gross margin increases. These processes can be explained with references to the fact that favorable variances are credited, and it is also necessary to credit Cost of Goods Sold (Wild, Shaw, & Chiappetta, 2012). As a result, it will be possible to close balances. Still, Cost of Goods Sold should be regarded as a debit balance, and the process of crediting caused by the favorable variance leads to decreasing Cost of Goods Sold (Wild et al., 2012). On the contrary, the gross margin increases because Cost of Goods Sold decreases while allowing the reference to more resources.

In a situation when the variance is unfavorable, Cost of Goods Sold can increase. In this case, the gross margin will potentially decrease. The unfavorable variance is regarded as a debit balance that leads to debiting Cost of Goods Sold. As a result, the amount increases (Wild et al., 2012). On the contrary, the increased amount of Cost of Goods Sold leads to decreasing the gross margin. From this point, the changes depend on differences between the debit and credit potential of balances (Wild et al., 2012). It is important to refer to actual costs while closing the variances in order to understand the difference between projected and received revenues or numbers presented on the balance sheet.

While discussing the expected changes, it is necessary to focus on the meaning of the favorable and unfavorable variances that influence the discussed changes in Cost of Goods Sold and the gross margin. The favorable variance means that the high operating profit is observed and that the stated actual costs are lower than the projected or budgeted ones. In this case, the higher revenues can be observed if other conditions remain equal for the concrete period of time (Wild et al., 2012). On the contrary, the unfavorable variance means that the actual costs are higher than the planned ones. As a result, the profit or revenue can be lower than it was expected. The focus is on the situation when other conditions remain equal.

References

(2008). Web.

Wild, J., Shaw, K., & Chiappetta, B. (2012). Fundamental accounting principles. New York, NY: McGraw-Hill Education.

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IvyPanda. (2022, June 30). Cost of Goods Sold & Favorable Variance: Aviation Industry. https://ivypanda.com/essays/aviation-industry-discussion-of-variances-and-case-study/

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IvyPanda. (2022, June 30). Cost of Goods Sold & Favorable Variance: Aviation Industry. Retrieved from https://ivypanda.com/essays/aviation-industry-discussion-of-variances-and-case-study/

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"Cost of Goods Sold & Favorable Variance: Aviation Industry." IvyPanda, 30 June 2022, ivypanda.com/essays/aviation-industry-discussion-of-variances-and-case-study/.

1. IvyPanda. "Cost of Goods Sold & Favorable Variance: Aviation Industry." June 30, 2022. https://ivypanda.com/essays/aviation-industry-discussion-of-variances-and-case-study/.


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IvyPanda. "Cost of Goods Sold & Favorable Variance: Aviation Industry." June 30, 2022. https://ivypanda.com/essays/aviation-industry-discussion-of-variances-and-case-study/.

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IvyPanda. 2022. "Cost of Goods Sold & Favorable Variance: Aviation Industry." June 30, 2022. https://ivypanda.com/essays/aviation-industry-discussion-of-variances-and-case-study/.

References

IvyPanda. (2022) 'Cost of Goods Sold & Favorable Variance: Aviation Industry'. 30 June.

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