Variance Analysis

Topics: Cost accounting, Variable cost, Cost Pages: 10 (2124 words) Published: February 3, 2015
Variance Analysis
1. Define standard costs and describe how managers use standard costs in the management cycle. 2. Explain how standard costs are developed and compute a standard unit cost. 3. Prepare a flexible budget and describe how variance analysis is used to control costs. 4. Compute and analyze direct materials variances.

5. Compute and analyze direct labor variances.
6. Compute and analyze manufacturing overhead variances.
7. Explain how variances are used to evaluate managers’ performance. Objective 1
Define standard costs and describe how managers use standard costs in the management cycle…… is a method of cost control that includes a measure of actual performance and a measure of the difference, or variance, between standard and actual performance Realistic estimates of costs

Based on analysis of both past and projected operating costs and conditions Provide a predetermined performance level for the standard costing method Usually stated in terms of cost per unit
Based on
Past costs
Engineering estimates
Forecasted demand
Worker input
Time and motion studies
Type and quality of direct materials

How the standard costing method differs from the normal and actual costing methods

Managers use standard costs to
Develop budgets
Direct materials
Direct labor
Variable manufacturing overhead
Establish goals for product costing
Managers use standard costs to
Apply dollar, time, and quality standards to work
Collect actual cost data
Managers compare standard and actual costs
Compute variances
Provide measures of performance that can be used to control costs and evaluate managers Analyze significant variances to determine cause
Unfavorable variances may reveal operating problems that require correcting Favorable variances may indicate favorable practices that should be implemented elsewhere Reporting
Managers use standard costs to report on
Managers’ performance

The Relevance of Standard Costing in Today's Business Environment Manufacturing companies
Increased automation
Significant decrease in direct labor cost
Corresponding decline in importance of labor-related standard costs and variances Many companies now apply standard costing only to direct materials and manufacturing overhead Service organizations

Use standard costing for direct labor and service overhead costs

What is the main difference between the standard costing and normal costing methods? The standard costing method uses estimated costs for direct materials and direct labor, whereas the normal costing method uses actual costs for these items The methods are similar in that both use estimated costs for manufacturing overhead

Fully integrated standard costing system
Uses standard costing for all elements of product cost
Direct materials
Direct labor
Manufacturing overhead
Inventory accounts and Cost of Goods Sold account
Maintained and reported in terms of standard costs
Standard unit costs used to compute account balances
Actual costs recorded separately
Actual and standard costs can then be compared

Six elements of a standard unit cost for a manufactured product 1. Price standard for direct materials
2. Quantity standard for direct materials
3. Standard for direct labor rate
4. Standard for direct labor time
5. Standard for variable overhead rate
6. Standard for fixed overhead rate

Standard Direct Materials Cost
… is found by multiplying the price standard for direct materials by the quantity standard for direct materials

Direct materials price standard
Careful estimate of the cost of a specific direct material in the next accounting period Developed by purchasing agent or purchasing department
Takes into account
All possible price increases
Changes in available quantities
New sources of supply
Estimate of the amount of direct materials that will be used in the accounting period Includes scrap and waste
Influenced by
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