Variance Analysis: Cost Control & Performance Evaluation

1. Chapter 11 Variance Analysis–A Tool for Cost Control and Performance Evaluation

2. Management by Exception Management by exception is the key to effective variance analysis and involves taking action only when actual and planned results differ significantly.

3. Standard Costing Standard Price: the Budgeted Price of the material, labor, or overhead for each unit. Standard Quantity: the Budgeted Quantity of the material, labor, or overhead for each unit.

4. Standard Costing Task Analysis: examines the production process in detail with an emphasis on determining what it should cost to produce a product, not what it cost last year.

5. Ideal vs. Practical Standards Ideal Standard: One that is attained only when near-perfect conditions are present. Assumes that every aspect of the production process, from purchasing through shipment, is at peak efficiency.

6. Ideal vs. Practical Standards Practical Standard: Should be attained under normal, efficient operating conditions. Takes into consideration that machines break down occasionally, that employees are not always perfect, that waste in materials does occur.

7. Flexible Budget Variance The difference between the flexible budget operating income and actual operating income is called the flexible budget variance. The flexible budget removes any differences due to volume.

8. Variance Analysis Basic Variance Analysis Model SQ x SP Flexible Budget Amount AQ x AP Actual Cost AQ x SP AQ (AP-SP) Price Variance SP (AQ - SQ) Usage Variance

9. Variable Overhead Variances The variable overhead efficiency variance does not measure the efficient use of overhead but rather the efficient use of the cost driver, or overhead allocation base, used in the flexible budget.

10. Fixed Overhead Variances Budget Variance: the difference between the amount of fixed overhead actually incurred and the flexible budget amount (also called spending variance). Volume Variance: the difference between the flexible budget amount and the amount of fixed overhead appliedto products.

11. Fixed Overhead Variances The fixed overhead volume variance should not be interpreted as favorable or unfavorable, or as a measure of the efficient utilization of facilities.

12. Variance Analysis Variance analysis is most effective in stable companies with mature production environments and has a number of drawbacks when used in many modern manufacturing environments.