Chapter 8 - Standard Costing and Variance analysis

What are the main types of variances?

• Material variances (price, usage)

• Labour variances (rate, efficiency)

• Overhead variances (fixed + variable)

• Sales variances (price, volume)

What is the difference between a fixed and flexible budget?

• Fixed budget: does not change with activity

• Flexible budget: adjusts to actual activity level

Why do we flex a budget before comparing to actual results?

To ensure both figures are based on the same activity level

What is a standard cost?

Expected cost per unit based on predetermined estimates

What is management by exception?

Focus only on significant variances that need investigation

What is a favourable and adverse variance?

• Favourable: better than expected result

• Adverse: worse than expected result

What is a Material Price Variance?

Difference caused by paying a different price for materials than expected

How do you calculate Material Price Variance?

(Actual quantity × standard price) − actual cost

What is a Material Usage Variance?

Difference caused by using more or less material than expected

How do you calculate Material Usage Variance?

(Standard quantity for actual output − actual quantity used) × standard price

What is a Labour Rate Variance?

Difference caused by paying a different wage rate than expected

How do you calculate Labour Rate Variance?

(Actual hours × standard rate) − actual labour cost

What is a Labour Efficiency Variance?

Difference caused by workers taking more or fewer hours than expected

How do you calculate Labour Efficiency Variance?

(Standard hours for actual output − actual hours worked) × standard rate

What two variances make up total variable overhead variance?

• Variable overhead expenditure variance

• Variable overhead efficiency variance

How do you calculate Variable Overhead Expenditure Variance?

(Actual hours × standard rate) − actual variable overhead cost

How do you calculate Variable Overhead Efficiency Variance?

(Standard hours − actual hours) × standard rate

How do you calculate Fixed Overhead Expenditure Variance?

Budgeted fixed overhead − actual fixed overhead

How do you calculate Sales Volume Variance?

(Actual units − budgeted units) × standard contribution per unit

How do you calculate Sales Price Variance?

Actual units × (actual price − budgeted price)

What is an operating statement?

Statement that reconciles budgeted profit to actual profit using variances

Why is comparative information needed when reporting variances?

Variances must be compared to a flexed budget at the same activity level

What is data bias in variance analysis?

When budgets are manipulated so variances appear favourable

How can variances be interrelated?

One decision affects multiple variances (e.g. cheaper materials → better price variance but worse usage variance)

Give one cause of materials price and usage variances.

• Price: supplier discounts or market changes

• Usage: waste, defects, or higher quality materials

Give one cause of labour rate and efficiency variances.

• Rate: wage changes or cheaper labour

• Efficiency: training, motivation, or material quality issues