Which of the following situations involving prepaid expenses would result in a favorable variance?

• A. No prepaid expenses were used during the period.
• B. Actual prepaid expense used is less than the amount budgeted.
• C. Actual prepaid expense used equals the amount budgeted.
• D. Actual prepaid expense used is more than the amount budgeted.

Answer: (B)

Verified step by step guidance

1. Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services to be received in the future. These are recorded as assets initially and expensed as they are used or consumed over time.
2. Define a favorable variance: A favorable variance occurs when actual results are better than expected or budgeted amounts. In the context of prepaid expenses, this means spending less than the budgeted amount while still meeting operational needs.
3. Analyze the options provided: Evaluate each scenario to determine its impact on the variance. For example, if no prepaid expenses were used during the period, it might indicate inefficiency rather than a favorable variance. Similarly, if actual prepaid expenses used equal the budgeted amount, there is no variance.
4. Focus on the correct answer: A favorable variance occurs when the actual prepaid expense used is less than the amount budgeted. This indicates cost savings while still utilizing the prepaid expenses effectively.
5. Conclude the reasoning: The correct answer is 'Actual prepaid expense used is less than the amount budgeted,' as this results in a favorable variance by spending less than planned while maintaining operational efficiency.