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Module 22 Standard Costs and Variance Analysis

Module 22 Standard Costs and Variance Analysis. Standard Costing. Definition: Standard costs are benchmarks for the cost of a product, process, or subcomponent. Used for Planning and Decision Making: Standards can be better predictors of future costs than actual past costs.

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Module 22 Standard Costs and Variance Analysis

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  1. Module 22 Standard Costs and Variance Analysis

  2. Standard Costing Definition: Standard costs are benchmarks for the cost of a product, process, or subcomponent. Used for Planning and Decision Making: • Standards can be better predictors of future costs than actual past costs. • Can be used in product pricing, bidding, and outsourcing decisions. Used for Controlling Operations: • Set performance expectations. • Variances from standards get attention of managers. • Management by exception - investigate variances. Ideal versus Practical Standards: • Ideal - attained at near perfect conditions. • Practical - set at near normal, efficient operations (better motivator).

  3. Variances and Flexible Budget Variances measure the difference between actual and standard costs: • Favorable (F) variance, if actual < standard. • Unfavorable (U) variance, if actual > standard. Note: variances may also be calculated for sales, but the interpretation is reversed. For best interpretation, we need to calculate the flexible budget for each activity. Flexible budget is defined as: Actual Activity * Standard Price FB is necessary to decompose variances into price and quantity components, and allows managers to investigate the components.

  4. Format for Variance Analysis Symbols: AQ = Actual quantity used; SQ = Standard quantity allowed; SP = Standard price per unit; AP = Actual price per unit. Total Flexible budget Total actual based on standard cost actual input cost AQ AQ SQ x AP xSPxSP |______________________| |___________________| AQ´ (AP - SP) (AQ - SQ)´ SP Price variance Quantity variance |____________________________________________| (AQ´AP) - (SQ´SP) Total variance

  5. Direct Labor Variance Symbols:AQ = Actual quantity of hours used; SQ = Standard quantity of hours allowed; SP = Standard wage rate per hour; AP = Actual wage rate. Total Flexible budget Total actual based on standard cost actual input cost AQ AQ SQ ´AP ´SP´SP |_____________________| |___________________| AQ´ (AP - SP) (AQ - SQ)´ SP Rate variance Efficiency variance |_____________________________________________| (AQ´AP) - (SQ´SP) Total flexible budget labor variance

  6. Interpreting Direct Labor Variances Large variances in either direction indicate performance is not as planned, due to either poor planning, poor management, or random fluctuation. Unfavorable rate variance: • Could indicate overtime had to be paid, depending on how overtime is accounted for. • Workers were not available at lower rates. Unfavorable wage rate variance with favorable efficiency variance: • Higher-paid workers performed work more efficiently. Favorable wage variance with unfavorable efficiency variance: • Lower-paid workers performed work less efficiently.

  7. Direct Materials Variance(assumes quantity purchased equals quantity used) Symbols:AQ = Actual quantity of materials used; SQ = Standard quantity of materials allowed; SP = Standard price per unit; AP = Actual price per unit. Total Flexible budget Total actual based on standard cost actual input cost AQ AQ SQ ´AP ´SP´SP |_____________________| |___________________| AQ´ (AP - SP) (AQ - SQ)´ SP Price variance Quantity variance |_____________________________________________| (AQ´AP) - (SQ´SP) Total flexible budget material variance

  8. Interpreting Direct Materials Variances Price variance - usually as a result of purchasing department, but other factors may intervene Quantity variances - usually as a result of production, but other factors may intervene. Unfavorable price variance with favorable quantity variance: Higher priced materials may have less flaws, increase production efficiency and and decrease the use of materials quantity. Favorable price variance with unfavorable quantity variance: Lower priced materials may cause increased use of materials and production problems; may also affect labor efficiency.

  9. Variable Manufacturing Overhead Variance Total Flexible budget Total actual based on standard VMOH actual use cost costs AQ AQ SQ x AP x SP x SP |____________________| |___________________| (AP – SP) AQ (AQ - SQ)´ SP Spending variance Efficiency variance |___________________________________________| (AQ x AP) - (SQ ´SP) Total Variable MOH variance

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