STANDARD COST AND VARIANCE ANALYSIS

It is carefully predetermined price, cost or quantity based on efficient operations and usually expressed on a per unit basis.

Standard Costing

Advantages of Standard Costing

• Budgeting

• Inventory Costing

• Overhead Application

• Price Formulation

• Benchmark for Performance Evaluation

Disadvantages of Standard Costing

• Drives inappropriate activities

• Fast-paced environment

• Slow feedback

• Unit-level information

Only Absorption Costing records production cost variances although variances are analyzed according to cost behavior (T/F)

True

Variance Analysis Cycle

1. Prepare standard cost performance report

2. Analyze variances

3. Identify questions

4. Receive explanations

5. Take corrective actions

6. Conduct next period’s operations

It indicates the quantity of raw materials or labor time required to produce a unit of product or to provide services.

Quantity Standard

It indicates what the cost of the quantity standards should be

Cost Standard

Users of Standard Costs

1. Manufacturing Firms

2. Service Firms

3. Non-profit Organizations

A standard cost system may be used in both job order and process costing systems (T/F)

True

Advantages of using standard costs

1. It serves as a key element in the application of management by exception, management by objectives, and responsibility accounting

2. It promotes economy and efficiency among employees

3. It simplifies bookkeeping and costing procedures

It is the difference between the actual costs and standard costs

Variance

When actual cost is less than standard cost (credit balance)

Favorable

When actual cost is greater than standard cost (debit balance)

Unfavorable

Standard Costing Control Loop

1. Establish standards

2. Measure actual performance

3. Compare actual performance with standard

4. Analyze the variances

5. Investigate the variances that are material or significant in amount

6. Take corrective action when needed. This may include revision of standards.

Only those variances that are material or significant in amount, whether favorable or unfavorable, should be investigated.

Management by exception

Two types of standards

1. Ideal Standards

2. Practical Standards (Attainable Standards)

It is only attainable only under the best circumstances. Also called Theoretical or Maximum-Efficiency Standards, they require perfect performance: no allowance for machine breakdown, work interruption, wastages, etc., 100% of the time

Ideal Standards

It is tight, but attainable standards. They allow for normal machine downtime and employee rest-periods, normal wastages, and work interruptions. These standards are attainable under normal though highly efficient operating conditions.

It is also the standards that normally used for product costing and cash budgeting purposes.

Practical Standards

It should reflect the final, delivered cost of materials, net of any discount and inclusive of allowances for handling costs

Standard Price per Unit

It should reflect the units of materials required to produce each unit of product, including allowances for unavoidable wastages, spoilage, as well as other normal inefficiencies.

Standard Quantity per Unit

It is a systematically pre-determined costs established by the management to be used as a basis for comparison with actual cost.

Standard cost

When standard costs are used for inventory valuation, and variances are immaterial/insignificant, the treatment for this is

written-off to cost of goods sold

When standard costs are used for inventory valuation, and variances are material/significant, the treatment for this is

It is allocated to ending Work-in-Progress, Finished goods, and COGS

Spending Variance is always a deviation form Actual Overhead Cost (T/F)

True

Relationship of Variable Overhead Efficiency Variance to Labor Efficiency Variance

Direct

Which variance is seldom or never analyzed because it is non-controllable?

Volume Variance

Static vs Flexible Budget

Type	Static	Flexible
Time Prepared	Before the start of the year	Year-end
Basis of Qty	Planned Level	Actual Level
Purpose	Planning and Control	Performance Evaluation