A general contractor is managing a project where material costs have increased 15% above budget due to market conditions. The original material budget was $320,000. How should this variance be classified in job cost reporting?
Correct Answer
B) Unfavorable variance
An unfavorable variance occurs when actual costs exceed budgeted costs. The 15% increase ($48,000) represents additional costs beyond the original budget, making it unfavorable regardless of whether it was controllable.
Why This Is the Correct Answer
An unfavorable variance occurs when actual costs exceed budgeted amounts, resulting in negative financial impact. The 15% increase in material costs ($48,000 over the $320,000 budget) represents additional expenses that reduce project profitability. In cost variance analysis, any cost overrun is classified as unfavorable because it creates a financial disadvantage compared to the planned budget, regardless of the underlying cause or controllability.
Why the Other Options Are Wrong
Option A: Neutral variance
A neutral variance would indicate no significant difference between actual and budgeted costs. Since material costs increased by 15% ($48,000), there is a substantial deviation from budget, making this classification incorrect.
Option C: Favorable variance
A favorable variance occurs when actual costs are less than budgeted amounts, resulting in cost savings. Since material costs increased above budget rather than decreased, this classification is opposite to the actual situation.
Option D: Controllable variance
Controllable variance refers to whether management could influence the outcome, not the financial impact classification. While market-driven material cost increases may be uncontrollable, the variance is still classified as unfavorable due to the cost overrun.
Memory Technique
Remember 'UFO' - Unfavorable when costs go Over budget. When actual costs exceed planned costs, it's always unfavorable regardless of the reason.
More NASCLA Questions
Which AIA document contains the general conditions that govern the rights and responsibilities of all parties in a construction contract?
A construction company has direct labor costs of $85,000, direct materials of $120,000, and overhead costs of $45,000 for a project. What is the total job cost?
What is the primary purpose of job cost accounting in construction?
A construction company has current assets of $350,000 and current liabilities of $280,000. What is the company's working capital?
In CSI MasterFormat, which division covers earthwork and site preparation?
In a mechanical drawing, what does 'CFM' typically measure?
In CSI MasterFormat Division 08, which of the following would typically be included?
On a mechanical plan, what does the symbol 'RTU' typically indicate?
What is the minimum preheat temperature for welding ASTM A992 steel when the ambient temperature is 15°F?
A general contractor's balance sheet shows total assets of $850,000, current liabilities of $320,000, and long-term debt of $180,000. What is the company's equity?
People Also Study
Business & Financial Management
120 questions · 70% to pass
Contract Administration
60 questions · 70% to pass
Project Management
60 questions · 70% to pass