Which are two common variances in standard costing?

Which are two common variances in standard costing?

• A. Revenue variance and Expense variance.
• B. Cash variance and Accrual variance.
• C. Inventory variance and Asset variance.
• D. Material price variance and Material usage variance.

Answer: (D)

Standard costing looks at how actual material costs stack up against predefined standard costs to find where things diverge. For materials, the two most common variances are material price variance and material usage variance. Material price variance measures whether you paid more or less per unit than you expected. It’s calculated as (actual price per unit − standard price per unit) × actual quantity purchased. If you paid more than the standard price, this variance is unfavorable; if you paid less, it’s favorable. Material usage variance checks whether you used more or less material than the standard quantity allowed for the actual output. It’s calculated as (actual quantity used − standard quantity allowed) × standard price per unit. Using more material than planned for the same level of production results in an unfavorable variance. For example, if the standard price is $2.00 per unit and you actually paid $2.20 for 1,000 units, the price variance is (2.20 − 2.00) × 1,000 = $200 unfavorable. If the standard quantity for the actual output is 900 units but you used 980 units, the usage variance is (980 − 900) × $2.00 = $160 unfavorable. These two material variances are the typical focus in standard costing, which is why they’re the correct pair. Other options mix in revenue, cash timing, or generic asset/inventory differences that aren’t the standard-costing variances for materials.

Standard costing looks at how actual material costs stack up against predefined standard costs to find where things diverge. For materials, the two most common variances are material price variance and material usage variance.

Material price variance measures whether you paid more or less per unit than you expected. It’s calculated as (actual price per unit − standard price per unit) × actual quantity purchased. If you paid more than the standard price, this variance is unfavorable; if you paid less, it’s favorable.

Material usage variance checks whether you used more or less material than the standard quantity allowed for the actual output. It’s calculated as (actual quantity used − standard quantity allowed) × standard price per unit. Using more material than planned for the same level of production results in an unfavorable variance.

For example, if the standard price is $2.00 per unit and you actually paid $2.20 for 1,000 units, the price variance is (2.20 − 2.00) × 1,000 = $200 unfavorable. If the standard quantity for the actual output is 900 units but you used 980 units, the usage variance is (980 − 900) × $2.00 = $160 unfavorable.

These two material variances are the typical focus in standard costing, which is why they’re the correct pair. Other options mix in revenue, cash timing, or generic asset/inventory differences that aren’t the standard-costing variances for materials.