Standard Costing and Variance Analysis

Define standard costing

Expected, budgeted cost per unit of output

Why are standard costs used?

Drawn up in advance and shows expected usage, efficiency and price of resources for each cost unit

Advantages of standard costing

Aids more accurate budgeting, gives targets, provides scheduling framework,, simplifies accounting

What is variance analysis?

Comparison of actual cost with budgets

What is control by exception?

Management can ignore activities which conform to expectations and concentrate on those that exceed tolerable limits

What are three ways of calculating variance?

Tabular approach, did-should approach, formulae

What are the 5 types of variance?

Sales, material, labour, variable overheads and fixed overheads

What does sale volume variance measure?

Difference between standard contribution as a result of the sales volume being higher or lower than budgeted

How do you calculate sales volume variance?

(AQ - BQ) × SCPU

What does material total variance measure?

Difference between the standard material cost of the output produced and the actual material cost incurred

How to calculate material total variance?

(SP × SQ) - (AP × AQ)

What does material price variance measure?

Difference between what the material did cost and what it should have cost

How to calculate material price variance?

(SP - AP) × AQ

What does material usage variance measure?

Difference between how much material should have been used and how much material was used, valued at standard price

How do you calculate material usage variance?

(SQ - AQ) × SP

What does labour total variance measure?

Difference between standard labour cost of the output produced and the actual labour cost incurred

How do you calculate labour total variance?

(SR × SH) - (AR × AH)

What does labour rate variance measure?

Difference between what the actual labour used did cost and what it should have cost

How do you calculate labour rate variance?

(SR - AR) × AH

What does labour efficiency variance measure?

Difference between hours that should have been worked for the number of units actually produced, and the actual number of hours worked, valued at the standard rate per hour

How do you calculate labour efficiency variance?

(SH - AH) × SR

What does variable production overhead total variance measure?

Difference between variable production overhead that should be used for actual output and the variable production overhead actually used

How to calculate variable production overhead total expenditure variance?

(SR × SH) - (AR × AH)

What does variable production overhead expenditure variance measure?

Difference between e actual cost of any change from the standard variable overhead rate per hour

How to calculate variable production overhead expenditure variance?

(SR - AR) × AH

What does variable production overhead efficiency variance measure?

Difference between cost of any change from the standard level of efficiency

How to calculate variable production overhead efficiency variance?

(SH - AH) × SR

What does fixed overhead expenditure variance measure?

Difference between budgeted and actual fixed overhead expenditure

How to calculate fixed overhead expenditure variance?

(BC - AC)

What does sales price variance measure?

Difference between what the sales revenue should have been for the actual quantity sold, and what it actually was

How to calculate sales price variance?

(AP - SP) × AQ

What may be a possible cause for favourable sales price variance?

Supply shortage, fewer quantity discounts than expected, standard selling price too low

What may be a possible cause for adverse sales price variance?

Supply surplus, more quantity discounts than expected, standard selling price too high

What may be a possible cause for favourable sales volume variance?

Efficient sales force, successful advertising campaign, potential market was larger than expected, additional demand attracted by reduced price, budgeted sales volume too conservative

What may be a possible cause for adverse sales volume variance?

Demotivated sales force, competitors increased advertising, unexpected fall in demand due to recession, failure to satisfy demand due to production difficulties, budgeted sales volume too optimistic

What may be a possible cause for favourable material price variance?

Unforeseen discounts received, more care taken in purchasing, suppliers brought from cheaper source, standard material price too high

What may be a possible cause for adverse material price variance?

Price increase in market, carless purchasing, supplies brought from more expensive source, standard material price too low

What may be a possible cause for favourable material usage variance?

Material used of quantity than standard, more effective use of materials, budgeting too much material per job

What may be a possible cause for adverse material usage variance?

Detective material/poorer quality used, excessive waste, theft, straight quality control, budgeting too little material per job

What may be a possible cause for favourable labour rate variance?

Use of lower paid workers, less overtime or fewer bonuses paid

What may be a possible cause for adverse labour rate variance?

Use higher grade labour than standard, more overtime or more bonuses, unexpected wage increase

What may be a possible cause for favourable labour efficiency variance?

Improved motivation, equipment etc. lead to efficiencies, consequences of learning effect, budgeting too much time

What may be a possible cause for adverse labour efficiency variance?

Lost time in excess of standard allowed, output lower than standard set, budgeting too little time

What may be a possible cause for favourable variable overhead expenditure variance?

Change in type of overhead or decrease in its cost

What may be a possible cause for adverse variable overhead expenditure variance?

Change in type of overhead or increase in cost

What may be a possible cause for favourable variable overhead efficiency variance?

Improved motivation, equipment or methods leading to quicker production, budgeting too much time per job

What may be a possible cause for adverse variable overhead efficiency variance?

Lost time in excess of standard allowed, output lower than standard set, budgeting too little time per job

What is an operating statements?

Reconciliation between budgeted contribution and actual profit