What is an expenditure variance?

What is an expenditure variance?

• A. Flexed budget v actual results. This variance is meaningful for cost control, it is a measure of what managers should have achieved compared to what was actually achieved.
• B. The difference between fixed and variable costs per unit.
• C. The variance due to price changes only.
• D. The variance used to measure sales performance.

Answer: (A)

Expenditure variance shows how much actual spending diverged from what should have been spent for the actual level of activity. To make a fair comparison when activity changes, we use a flexed budget that adjusts the original budget to the actual output produced. The difference between what was actually spent and what the flexed budget says should have been spent reveals whether spending was under or over controls. This is a cost-control tool that helps managers see if costs were managed effectively for the actual level of activity. The other ideas mix with different concepts: the difference between fixed and variable costs per unit is about cost structure, not a spending variance; a variance due only to price changes is a price (or rate) variance; and a variance used to measure sales performance relates to revenue, not costs.

Expenditure variance shows how much actual spending diverged from what should have been spent for the actual level of activity. To make a fair comparison when activity changes, we use a flexed budget that adjusts the original budget to the actual output produced. The difference between what was actually spent and what the flexed budget says should have been spent reveals whether spending was under or over controls. This is a cost-control tool that helps managers see if costs were managed effectively for the actual level of activity.

The other ideas mix with different concepts: the difference between fixed and variable costs per unit is about cost structure, not a spending variance; a variance due only to price changes is a price (or rate) variance; and a variance used to measure sales performance relates to revenue, not costs.