Standard Costing and Variance Analysis in Managerial Accounting

What are Standard Costs?

Predetermined price, cost, and quantity of input needed to produce one unit, used for planning, control, and performance evaluation.

What are the main uses of Standard Costs?

To compare expected vs actual costs, planning, controlling, and performance evaluation.

What factors are considered when setting standards?

Historical data, competitor data, macroeconomic factors, weather, supply chain, and politics.

What must standards consider regarding workforce and equipment?

Employee skills, machine efficiency, and material quality.

What are Practical Standards?

Standards that allow for normal downtime, rest breaks, and assume efficient but average workers.

What is Variance in the context of Standard Costs?

The difference between actual performance and expected performance.

What is the purpose of using Standard Costing?

To create variance signals that indicate what should have happened versus what did happen.

What does Variance Analysis determine?

What caused changes, what's controllable, and who is responsible.

What is a Favorable Variance?

When actual performance is better than budgeted, raising income.

What is an Unfavorable Variance?

When actual performance is worse than budgeted, lowering income.

What does Static Budget Variance compare?

Actual results versus the static budget (original planned level).

What is the formula for Static Budget Variance?

Static Budget Variance = Actual - Static.

What is a Flexible Budget?

A budget that uses actual units sold or produced while maintaining the same format as the original budget.

What is the formula for Flexible Budget Variance (Formula 1)?

(actual price − standard price) × actual quantity.

What is the formula for Flexible Budget Variance (Formula 2)?

(actual cost − budgeted cost @ actual units).

What is Sales Volume Variance due to?

Differences in units sold, calculated as price × difference in units.

What does Sales-Price Variance measure?

Actual quantity sold multiplied by the difference between actual price and standard price.

What are Direct-Cost Variances calculated using?

Standard costing, which includes standard price/quantity and actual price/quantity.

What is Price Variance?

The difference when a different price is paid than the standard price.

What is Efficiency Variance?

The difference when more or less input is used than the standard allows.

What is the formula for Direct Materials Price Variance?

AQ purchased × (AP − SP).

What is the formula for Direct Materials Efficiency Variance?

SP × (AQ used − SQ allowed).

What is the entry for Direct Materials Price Variance at purchase?

Debit Direct Materials (at standard), Debit or Credit DM Price Variance, Credit Accounts Payable (at actual).

What should be done if all goods are sold regarding variances?

Close variances to Cost of Goods Sold (COGS).

When should variances be investigated?

If the variance exceeds a threshold of dollar amount, percentage amount, or strategic importance.

What does a Favorable Variance indicate?

Costs saved and higher productivity.

How can variance analysis help firms?

By choosing new suppliers, changing processes, negotiating prices, and redesigning products.

In what other areas can standard costing be used?

In non-manufacturing contexts such as auditing hours, billing, and variance to budget.