CSLB Law & Business ExamBusiness FinancesMedium
A contractor is evaluating the efficiency of material usage on a job. The project budget allocated $15,000 for materials. Due to unforeseen site conditions and waste, the actual materials cost was $18,000. What is the material cost variance for this project?
- A$3,000 favorable
- B$18,000 favorable
- C$15,000 unfavorable
- D$3,000 unfavorable
Show answer & explanationAnswer & explanation
Correct answer: D. $3,000 unfavorable
A variance is the difference between the actual cost and the budgeted cost. If the actual cost is higher than the budgeted cost, it is an unfavorable variance. Here, $18,000 (Actual) - $15,000 (Budgeted) = $3,000. Since actual was higher, it's unfavorable.
Why the other options are wrong
- A. Incorrect. A favorable variance means actual costs were less than budgeted.
- B. Incorrect. This is the actual amount, and it's favorable, which is wrong.
- C. Incorrect. This is the budgeted amount, not the variance.
Material Cost Variance
The difference between the actual cost of materials used and the standard or budgeted cost of materials that should have been used for a given level of output.
- Calculated as Actual Cost - Standard/Budgeted Cost.
- Unfavorable variance: Actual cost > Budgeted cost.
- Favorable variance: Actual cost < Budgeted cost.
Memory trick: Variance is the difference; unfavorable means worse than planned.