Chapter 10: Standard Costs and Variances

This set of vocabulary flashcards covers key terms, definitions, and components of Standard Costs and Variance Analysis as presented in Chapter 10.

Standard

A benchmark for measuring performance.

Price Standards

Standards that specify how much should be paid for each unit of the input.

Quantity Standards

Standards that specify how much of an input should be used to make a product or provide a service.

Standard Price per unit (Direct Materials)

The price that reflects the final, delivered cost of the materials.

Standard Quantity per unit (Direct Materials)

The amount of material required for each unit of finished product, including an allowance for unavoidable waste, spoilage, and other normal inefficiencies.

Standard Rate per hour (Direct Labor)

A rate that includes not only wages earned but also fringe benefits and other labor costs.

Standard Hours per unit (Direct Labor)

The labor hours required to complete one unit of product, often determined by time and motion studies.

Standard Cost Card

A detailed listing of the standard amounts of direct materials, direct labor, and variable overhead inputs that should go into a unit of product, multiplied by the standard price or rate set for each input.

Price Variance

The difference between the actual price of an input and its standard price, multiplied by the actual amount of the input purchased: $AQ imes (AP - SP)$.

Quantity Variance

The difference between how much of an input was actually used and how much should have been used for the actual level of output, stated in dollar terms: $SP imes (AQ - SQ)$.

Actual Quantity ($AQ$)

The actual amount of direct materials, direct labor, and variable manufacturing overhead used, expressed in terms of inputs (e.g., pounds, ounces) rather than finished units.

Standard Quantity ($SQ$)

The standard quantity of inputs allowed for the actual level of output achieved.

Labor Rate Variance

The difference between the actual labor rate and the standard labor rate, multiplied by the actual hours worked: $AH imes (AR - SR)$.

Labor Efficiency Variance

The difference between the actual hours worked and the standard hours allowed for the actual output, multiplied by the standard rate: $SR imes (AH - SH)$.

Variable OH Rate Variance

The variance computed as $AH imes (AR - SR)$, using the variable portion of the predetermined overhead rate.

Variable OH Efficiency Variance

The variance computed as $SR imes (AH - SH)$, based on the allocation base (direct labor or machine hours) used in the predetermined overhead rate.

Purchasing Manager responsibility

The manager usually held responsible for the materials price variance.

Production Manager responsibility

The manager usually held responsible for the materials quantity variance.

Management by Exception

A management approach where standard costs provide benchmarks to highlight significant deviations from planned performance.

Standard Cost Material Price Variance Subtlety

When the quantity of materials purchased differs from the quantity used, the price variance is based on the quantity purchased, while the quantity variance is based on the quantity used.