Standard Costing and Variance Analysis

Standard Costing

• Standard costs are predetermined, targeted costs set by management for various purposes (costing, pricing, budgeting, cost control, and performance measurement).
• Standards are like budgeted amounts, but appear in ledger accounts. Budgets don't.
• A standard costing system is often ineffective without a flexible budgeting system.
• Standards can be ideal (theoretically perfect) or currently attainable (practically achievable). Historical standards are not used, as they could perpetuate inefficiencies.
• Used by service, nonprofit, and manufacturing organizations.
• Useful in process and job-order costing. Standards in manufacturing are broadly classified as quantity (raw materials or labor time per unit) and cost (peso amount of the quantity standard per unit of input).

Standard Cost Variance

• Standard costs are pre-determined costs used as a comparison to actual costs.
• Variance analysis explains the differences between standard and actual costs.
• Variance = Actual Costs - Standard Costs
• Favorable variance (AC < SC): credit balance
• Unfavorable variance (AC > SC): debit balance
• If variances are immaterial, write them off to cost of goods sold.
• Material/significant variances are allocated to work in process, finished goods, and cost of goods sold.
• Managers focus on results that significantly differ from expectations (management by exception).

Direct Material Variance

• Direct Material (DM) Variance = Actual Costs – Standard Costs = (AQ x AP) – (SQ x SP)
  • AQ = Actual Quantity
  • AP = Actual Price
  • SQ = Standard Quantity
  • SP = Standard Price
• Materials Quantity Variance (MQV) = (AQ – SQ) x SP
• Materials Price Variance (MPV) = AQ x (AP – SP)

Direct Labor Variance

• Direct Labor (DL) Variance = Actual Costs – Standard Costs = (AH x AR) – (SH x SR)
  • AH = Actual Hours
  • AR = Actual Rate
  • SH = Standard Hours
  • SR = Standard Rate
• Labor Rate Variance (LRV) = AH x (AR – SR)
• Labor Efficiency Variance (LEV) = (AH – SH) x SR

Factory Overhead (FOH) Variance

• FOH Variance = Actual FOH – Standard FOH
• 1-way variance analysis: Actual FOH – Budgeted FOH
• 2-way variance analysis:
• Controllable variance
• Volume variance
• 3-way variance analysis:
• Spending variance
• Efficiency variance
• Volume variance
• 4-way variance analysis
• Variable spending variance
• Fixed spending variance
• Variable efficiency variance
• Fixed volume variance

Gross Profit Variance Analysis

• Gross profit variance analysis assesses operational efficiency, ensuring gross profit covers expenses and generates profit.
• Gross Profit (GP) variance = Actual/Current GP – Budget/Previous GP.
• Favorable if Actual > Budget, and unfavorable if Actual < Budget .
• Price Factor: difference between actual and budgeted sales price.
• Cost Factor: difference between actual and budgeted cost of goods sold.
• Volume Factor: difference between actual and budgeted unit of goods sold.

Explore the essential concepts of standard costing and variance analysis. This quiz covers the importance of predetermined costs in budgeting and performance measurement, and details how variance analysis helps in understanding the discrepancies between standard and actual costs. Ideal for students studying accounting or management principles.