Material variance is based on actual production. Which statement describes it?

• A. Based on actual production - what did it cost?
• B. Based on actual production - what should it have cost?
• C. Based on budgeted production - what should it have cost?
• D. Based on actual production - what did it cost and what should it cost?

Answer: (D)

Material variance looks at how much was actually spent on materials for the production that actually occurred, compared with how much the materials should have cost for that same level of production. Since it’s based on actual production, you start with the actual output, determine the standard cost for producing that amount (standard quantity of material needed for the actual units produced times the standard price per unit), and then compare it with the real cost incurred. The difference shows whether materials were cheaper or more expensive than planned for the actual production. This total variance can be broken into a price variance and a usage variance, both tied to the actual output, rather than to a budgeted or planned level.