Standard Costing and Variance Analysis

Standards

Expected levels of performance expressed in various forms.

Societal standards

Reflect ethics, values, culture, laws, and decrees.

Organizational standards

Expressed in policies, procedures, rules, and manuals.

Financial standards

Quantitative measures for objectivity in measurement.

IFRS

International Financial Reporting Standards in financial accounting.

Tax standards

Tax laws and regulations in the field of taxation.

Standards in management

Used in planning, organizing, directing, and controlling.

Standards setting

Strategic process involving management and operational personnel.

Theoretical standards

Ideal standards set at maximum efficiency without allowances.

Practical standards

Attainable standards with allowances for normal interruptions.

Lax standards

Allow maximum inefficiencies and ineffectiveness.

Budgeted quantity

Estimated production level planned for the next 12 months.

Standard quantity

Quantity of materials/ingredients for budgeted production.

Standard capacity

Estimated capacity that should have been used.

Normal capacity

Average production level over the budget period.

Normal volume

Middle point of variations in budgeted production levels.

Capacity vs. Quantity

Capacity is units produced, quantity is inputs required.

Capacity Levels

Example: Melanie Corp. machine with 200,000 units capacity.

Practical Capacity

Attainable performance estimate of 170,000 units.

Budgeted Capacity

Planned production of 160,000 units for the coming year.

Normal Capacity

Average production over 5 years, 165,600 units.

Standard Capacity

First-year production standard of 180,000 units.

Standard Labor Time

Time required per unit, 2 hours.

Total Production

Cumulative production over 5 years, 828,000 units.

Maximum Capacity

Machine's maximum output, 200,000 units.

Standard Capacity First Year

First-year standard labor hours, 360,000.

Standard Costs

Include standard quantity and price for comparison with actual costs.

Standard Quantity x Standard Price

Formula for calculating standard costs.

Standard Costs Committee

Group setting standard quantities and prices.

Variable Overhead Rate

Rate based on past experiences adjusted for developments.

Fixed Overhead Rate

Rate based on normal capacity.

Standard Rate or Price

Set on a net basis.

Standard Hours and Quantity

Set at a gross basis with allowances.

Standard Materials Costs

Determined by input/output and price calculations.

Standard Labor Costs

Determined by hours, rate, and productivity.

Standard Direct Labor Rate

Hourly rate including fringe benefits.

Standard Direct Labor Costs

Cost per unit based on labor time and rate.

Standard Costs Sheet

Departmental summary of standard costs.

Plant Standard Costs Sheet

Summary of all departmental standard costs.

Profit Planning

Use of standard costs for predicting scenarios.

Responsibility Accounting

Assigning controllable costs to various responsibility centers.

Budgeting

Relies on standard costs for anticipating budgeted costs.

Performance Evaluation

Utilizes standard costs as benchmarks for evaluating actual performances.

Pricing

Involves standard costs for setting regular and incremental sales prices.

Interim Reporting

Utilizes standard costs for comparing with actual costs in managerial decisions.

Costs Variance Analysis

Based on master or flexible budget, includes static budget variance and sales volume variance.

Flexible Budget Variance

Difference between actual costs and standard costs at a given activity level.

Sales Volume Variance

Difference between flexible and static budget amounts with constant sales prices and costs.

Sales Quantity Variance

Component of sales volume variance, includes market share and market size variances.

Unfavorable Variance

Occurs when actual costs exceed standard costs.

Favorable Variance

Occurs when actual costs are lower than standard costs.

Normal Range of Expectations

Bounded by maximum and minimum estimates, considers deviations from plans.

Exceptional Variance

Significantly deviates from normal variance, requires top management attention.

Direct Materials

Includes price and quantity variances in production cost analysis.

Direct Labor

Involves rate and efficiency variances in production cost analysis.

Factory Overhead

Comprises controllable and volume variances in production cost analysis.

Materials Price Variance

Difference in price per quantity of direct materials.

Materials Quantity Variance

Difference in quantity of direct materials used.

Net Direct Materials Costs Variance

Total direct materials cost variance combining price and quantity variances.

Responsibility Centers

Segments of an organization for which individual managers have control.

Master Budget Variance

Difference between actual amount and budgeted amount in a master budget.

Credit Variance

Term for favorable cost variance, deducted from standard cost.

Debit Variance

Term for unfavorable cost variance, added to cost of goods sold.

Planning Gap

Difference between actual and standard costs, investigated for future avoidance.

Normal Deviation

Expected range of deviations from average, bounded by high and low-end limits.

Exceptional Variance Priority

Given top management attention due to significant deviation from normal variance.

Favorable materials price variance

Savings from lower material costs, boosting estimated profit

Unfavorable materials quantity variance

Overspending due to excess units used

AQAP

Actual Quantity x Actual Price for Materials Price Variance

AQSP

Actual Quantity x Standard Price for Materials Quantity Variance

SQSP

Standard Quantity x Standard Price for Materials Quantity Variance

Joint Materials Variance

Difference in price and quantity for materials cost analysis

Materials Purchase-Price Variance

Difference in actual and standard price x actual quantity purchased

Direct Labor Cost Variances

Analysis similar to direct materials, considering hours and rate

Labor Rate Variance

Difference in rate per hour for labor cost analysis

Labor Efficiency Variance

Difference in hours for labor cost analysis

AHAR

Actual Hours x Actual Rate for Labor Rate Variance

AHSR

Actual Hours x Standard Rate for Labor Efficiency Variance

SHSR

Standard Hours x Standard Rate for Labor Efficiency Variance

Joint Labor Variance

Mix variance of rate and efficiency variances in labor cost analysis

Factory Overhead Variance Analysis

Analyzing overhead costs including fixed and variable components

Variable Overhead Costs Variances

Efficiency and spending variances in variable overhead costs