Cost variance is defined as which of the following?

Cost variance is defined as which of the following?

• A. The difference between actual cost and budgeted cost for the period
• B. The difference between standard cost for the actual output and actual cost
• C. The difference between actual cost and standard cost for the actual output
• D. The difference between actual cost and standard cost for the budgeted output

Answer: (C)

Cost variance measures how much actual costs differ from what those costs should have been for the actual level of output. In standard costing, you compare the actual cost incurred to the standard cost that is set for the actual output produced; the difference is the cost variance. If actual costs exceed the standard, the variance is unfavorable because spending was higher than planned. If actual costs are below the standard, the variance is favorable, indicating cost efficiency. Other descriptions don’t fit because one compares actual costs to the period’s budget (a budget or spending variance, not the standard-to-actual comparison for the actual output), another would invert the order (standard minus actual, which flips the sign), and another mixes the budgeted output with the standard cost rather than using the actual output with its standard cost.

Cost variance measures how much actual costs differ from what those costs should have been for the actual level of output. In standard costing, you compare the actual cost incurred to the standard cost that is set for the actual output produced; the difference is the cost variance. If actual costs exceed the standard, the variance is unfavorable because spending was higher than planned. If actual costs are below the standard, the variance is favorable, indicating cost efficiency.

Other descriptions don’t fit because one compares actual costs to the period’s budget (a budget or spending variance, not the standard-to-actual comparison for the actual output), another would invert the order (standard minus actual, which flips the sign), and another mixes the budgeted output with the standard cost rather than using the actual output with its standard cost.