Standard Costing and Variance Analysis

Comprehensive vocabulary flashcards covering the definitions, formulas, and concepts discussed in the Financial Management 300 lecture on standard costing and variance analysis.

Standard Cost

A predetermined or average expected cost per unit that should be achieved under normal circumstances, most appropriate for businesses with identical or repetitive processes.

Management by Exception

The practice of determining the root cause of a variance and taking corrective action to improve performance and avoid similar mistakes in the future.

Currently Attainable Standards

Standards set at a level that represents efficient production but allows for normal spoilage, machine breakdowns, or lost time.

Sales Price Variance

$$(Actual\,price - Standard\,price) \times Actual\,units\,sold$$

Sales Volume Variance (Variable Costing)

$$(Actual\,units\,sold - Budgeted\,units\,sold) \times Standard\,Contribution\,p.u.$$

Sales Volume Variance (Absorption Costing)

$$(Actual\,units\,sold - Budgeted\,units\,sold) \times Standard\,Gross\,Profit\,p.u.$$

Sales Mix Variance

$(Actual\,units\,sold\,\text{(actual mix)} - Actual\,units\,sold\,\text{(standard mix)}) \times Standard\,Contribution/GP\,p.u.$. It focuses on how many units should have been sold per product based on the standard mix.

Sales Quantity Variance

$(Actual\,units\,sold\,\text{(standard mix)} - Budgeted\,units\,sold) \times Standard\,Contribution/GP\,p.u.$. It measures the effect of moving away from the planned total sales volume.

Material Price Variance

$(Actual\,price - Standard\,price) \times Actual\,quantity\,purchased/issued$. It accounts for the difference between expected and actual prices paid for raw materials.

Material Usage Variance

$$(Actual\,quantities\,issued - Standard\,quantity\,required\,for\,actual\,output) \times Standard\,price$$

Material Mix Variance

$$(Actual\,quantities\,issued\,\text{(actual mix)} - Actual\,quantities\,issued\,\text{(standard mix)}) \times Standard\,Cost$$

Material Yield Variance

$(Actual\,quantities\,issued\,\text{(standard mix)} \times Standard\,Cost) - (Actual\,output\,in\,units \times Standard\,Cost\,per\,unit)$. This measures the efficiency of turning raw material inputs into finished output.

Labour Rate Variance

$$(Actual\,labour\,hour\,rate - Standard\,labour\,hour\,rate) \times Actual\,labour\,hours$$

Labour Efficiency Variance

$(Actual\,labour\,hours - Budgeted\,labour\,hours) \times Standard\,labour\,rate\,per\,hour$. It measures the state of production of maximum output with limited resources and minimum wastage.

Idle Time

The difference between clocked hours and active work hours ($\text{Clock\,hours} - \text{Work\,hours} = \text{Idle\,time}$).

Variable Overhead Expenditure Variance

$$(Actual\,variable\,overheads\,incurred - (Actual\,labour\,hours \times Standard\,variable\,overhead\,cost\,per\,labour\,hour))$$

Variable Overhead Efficiency Variance

$((Actual\,labour\,hours \times Standard\,variable\,overhead\,cost\,per\,labour\,hour) - Actual\,output \times Standard\,cost\,per\,unit)$. This variance reflects the effects of labour efficiency on factory overhead.

Fixed Overhead Expenditure Variance

$$(Actual\,fixed\,overheads\,incurred - Budgeted\,fixed\,overheads\,to\,be\,incurred)$$

Fixed Overhead Volume Variance

Used in an absorption costing system to measure the difference between budgeted fixed overheads for a normal period and (Actual output $\times$ Standard cost per unit).

Homogeneous Products

Identical or repetitive products for which a standard costing system is most appropriate.