Standard Costs and Variance Analysis

This flashcard set covers standard costing, variance analysis for materials, labor, and overhead, and the components of a balanced scorecard.

Standard (Cost)

A unit amount representing a predetermined cost.

Budget

A total amount representing a predetermined cost.

Ideal standards

Optimum levels of performance under perfect operating conditions.

Normal standards

Efficient levels of performance that are attainable under expected operating conditions.

Direct materials price standard

The cost per unit of direct materials that should be incurred.

Direct materials quantity standard

The quantity of direct materials that should be used per unit of finished goods.

Standard direct materials cost

Calculated as ($Standard Price \times Standard Quantity$). For Xonic Tonic, this is $\$12.00$ ($\$3.00 \times 4.0\,pounds$).

Direct labor price standard

The rate per hour that should be incurred for direct labor.

Direct labor quantity standard

The time that should be required to make one unit of the product.

Standard direct labor cost

Calculated as ($Standard Rate \times Standard Hours$). For Xonic Tonic, this is $\$30$ ($\$15.00 \times 2.0\,hours$).

Standard predetermined overhead rate

Determined by dividing budgeted overhead costs by an expected standard activity index, such as standard direct labor hours or standard machine hours.

Total standard cost per unit

The sum of the standard costs of direct materials, direct labor, and manufacturing overhead.

Variances

The differences between total actual costs and total standard costs.

Favorable variance

Occurs when actual costs are less than standard costs ($Actual Costs < Standard Costs$).

Unfavorable variance

Occurs when actual costs are greater than standard costs ($Actual Costs > Standard Costs$).

Total Materials Variance (TMV)

The formula is $(Actual Quantity \times Actual Price) - (Standard Quantity \times Standard Price)$.

Materials Price Variance (MPV)

The formula is $(Actual Quantity \times Actual Price) - (Actual Quantity \times Standard Price)$.

Materials Quantity Variance (MQV)

The formula is $(Actual Quantity \times Standard Price) - (Standard Quantity \times Standard Price)$.

Total Labor Variance (TLV)

The formula is $(Actual Hours \times Actual Rate) - (Standard Hours \times Standard Rate)$.

Labor Price Variance (LPV)

The formula is $(Actual Hours \times Actual Rate) - (Actual Hours \times Standard Rate)$.

Labor Quantity Variance (LQV)

The formula is $(Actual Hours \times Standard Rate) - (Standard Hours \times Standard Rate)$.

Total overhead variance

The difference between actual overhead costs and overhead costs applied to work done based on standard hours allowed.

Overhead controllable variance

A price variance that shows whether overhead costs are effectively controlled by comparing actual overhead with budgeted costs for standard hours allowed.

Overhead volume variance

A quantity variance that relates to whether fixed costs were under- or over-applied; calculated as $(Normal Capacity Hours - Standard Hours Allowed) \times Fixed Overhead Rate$.

Management by Exception

A management principle facilitated by variance reports where top management focuses on significant variances.

Balanced scorecard

An integrated system of financial and nonfinancial measures used to link performance measurement and a company’s strategic goals.

Financial perspective

A balanced scorecard perspective including objectives such as return on assets, net income, credit rating, and share price.

Customer perspective

A balanced scorecard perspective including objectives such as customer retention, brand recognition, and percentage of customers who would recommend the product.

Internal process perspective

A balanced scorecard perspective including objectives such as percentage of defect-free products, stockouts, labor utilization rates, and waste reduction.

Learning and growth perspective

A balanced scorecard perspective including objectives such as number of cross-trained employees, training hours, ethics violations, and reportable accidents.