What is cost variance analysis and what would indicate a problem?

What is cost variance analysis and what would indicate a problem?

• A. A method to forecast future costs over multiple years.
• B. Comparison of actual costs vs budget; significant variances may indicate inefficiency, theft, or scope changes.
• C. A review of supplier contracts for negotiable terms.
• D. A qualitative assessment of supplier performance.

Answer: (B)

Cost variance analysis is the process of comparing what actually happened with costs to what was planned in the budget or standard costs. It highlights differences, or variances, and helps you see where spending is off track. When variances are large or persist over time, they point to real problems: inefficiency in how resources are used, potential theft or waste, or changes in project scope that weren’t anticipated. This analysis guides corrective actions, such as tightening controls, adjusting plans, or investigating specific cost drivers like labor hours, material prices, or scrap and waste. Other tasks described by the other choices aren’t about comparing actual costs to what was budgeted. Forecasting costs over multiple years is planning ahead, reviewing supplier contracts is about negotiating terms, and qualitatively assessing supplier performance focuses on non-cost factors.

Cost variance analysis is the process of comparing what actually happened with costs to what was planned in the budget or standard costs. It highlights differences, or variances, and helps you see where spending is off track. When variances are large or persist over time, they point to real problems: inefficiency in how resources are used, potential theft or waste, or changes in project scope that weren’t anticipated. This analysis guides corrective actions, such as tightening controls, adjusting plans, or investigating specific cost drivers like labor hours, material prices, or scrap and waste.

Other tasks described by the other choices aren’t about comparing actual costs to what was budgeted. Forecasting costs over multiple years is planning ahead, reviewing supplier contracts is about negotiating terms, and qualitatively assessing supplier performance focuses on non-cost factors.