Beruflich Dokumente
Kultur Dokumente
Our Focus
Distinguish between a standard and a budget.
Identify the advantages of standard costs.
Describe how standards are set.
State the formulas for determining direct materials and
direct labor variances.
State the formulas for determining manufacturing overhead
variances.
Discuss the reporting of variances.
The Need for Standards
Standards
• Are common in business
• Are often imposed by government agencies (and
called regulations)
Standard costs
• Are predetermined unit costs
• Used as measures of performance
Distinguishing Between Standards and
Budgets
STANDARD
STANDARD STANDARD DIRECT
DIRECT x DIRECT = LABOR COST
LABOR RATE LABOR HOURS PER UNIT
Manufacturing Overhead Standard
labour Manufacturing
materials Overheads
Variances from Standards
Variances from standards
• Differences between total actual costs and total
standard costs
• Unfavorable variances occur when too much is paid
for materials and labor or when there are inefficiencies
in using materials and labor
• Favorable variances occur when there are efficiencies
in incurring costs and in using materials and labor
– A variance is not favorable if quality control standards are
sacrificed
Analyzing variances
Variances must be analyzed to
determine their significance
• First, determine the cost elements that comprise the
variance
• For each manufacturing cost element, a total dollar
variance is computed. Then this variance is analyzed
into a price variance and a quantity variance
Variance Relationships
Formula for Total
Materials Variance
AQ X AP AQ XSP SQ XSP
4200 X 3.10=13020 4200 X 3.00 =12,600 4000 X3= 12,000
1 - 2 1 - 3
Price Variance Quantity Discount
13,020-12,600 12,600- 12,000
=Rs 420 UF =Rs 600 uf
1-3
Total Variance
13,020-12,000
=Rs 1020 UF
Causes of Materials Variances
Materials variances may be caused by a
variety of factors, including both
internal and external factors
• Investigating materials price variances begins in the
purchasing department, but the variance may be beyond
the control of purchasing (for ex., prices rise faster than
expected)
• Investigating materials quantity variance begins in the
production department, but the variance may be beyond
the control of production (for ex., faulty machinery)
Formula for Total
Labor Variance
AH X AR AH XSR SH XSR
2100 X 9.80=20580 2100 X 10 =21,000 2000 X10= 20,000
1 - 2 1 - 3
Price Variance Quantity Variance
20,580-21,000 21,000- 20,000
=Rs 420 F =Rs 1000 uf
1-3
Total Variance
20,580-20,000
=Rs 580UF
Causes of Labor Variances
Labor variances may be caused by a
variety of factors
• Labor price variances usually result from either paying
workers higher wages than expected or misallocating
workers (for ex., using skilled workers in place of
unskilled workers)
• Labor quantity variances relate to the efficiency of
workers and are usually related to the production
department
Actual Overhead Costs
Overhead Total
Actual _ Applied based = Overhead
Overhead on Standard Variance
Hours Allowed
Formula for Overhead
Controllable Variance
Overhead
Actual _ Budgeted based =
Overhead
Controllable
Overhead on Standard
Variance
Hours Allowed
Formula for
Overhead Volume Variance
The Overhead Volume Variance indicates whether
fixed costs were efficiently used during the period.
The formula for computing the volume variance is
as follows:
Reporting variances
• All variances should be reported to appropriate levels of
management as soon as possible so that corrective
action can be taken
• The form, content, and frequency of variance reports
vary considerably among companies
• Variance reports facilitate the principle of “management
by exception”
• In using variance reports, top management normally
looks for significant variances
Let’s Review
b. A management decision
c. A worker decision.
decision
d. Preferably set at the ideal level of
performance.
Let’s Review
b. A management decision
c. A worker decision.
d. Preferably set at the ideal level of
performance.