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Standard Costing and Variance Analysis
Standard Costing and Variance Analysis
Essential Reading
Drury Chapters 12, 15 and 16 (pages 461 and 468-482) Drury C (1999) Standard costing: a technique at variance with modern management?, Management Accounting, November Graham C, Lyall D and Puxty A (1992) Cost control: the managers perspective Management Accounting, October Kaplan RS and Norton DP (2000) The Balanced Scorecard Measures that Drive Performance. Harvard Business Review, January-February, pages 71-79.
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Relationship between the budgeted and actual profit (McLaney & Atrill 2002, page 398)
Budgeted profit plus All favourable variances minus All adverse (unfavourable) variances equals Actual profit
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Numerical Example
Example
Sales Variances
Difference between Original Budget Profit and Flexed Budget Profit = Sales Volume Variance (Drury calls this the sales margin volume variance)
Materials Variances
Material Price Variance: What did we pay for the quantity of materials we actually bought compared to what we had budgeted for? Need standard price = 61,350/21,250 = 2.887 (SP AP) X QP = (Standard price Actual price) X Quantity purchased = (3.00 2.887) X 21,250 = (0.113) X 21,250 = 2,400 (F)
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Materials Variances
Materials Usage Variance: How much materials did we use compared to what we thought we should have used? Work this out at budgeted costs. (SQ AQ) X SP (Standard quantity Actual quantity) X Standard price = (20,750 21,250) X 3.00 = 500 X 3.00 = 1,500 (A)
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Labour Variances
Labour Rate Variance: What did we pay for the hours we actually used compared to what we had budgeted for? Need standard rate = 68,500/8,250 = 8.303 (SR AR) X AH = (Standard rate Actual rate) X Actual hours = (8.00 8.303) X 8,250 = 2,500 (A)
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Labour Variances
Labour Efficiency Variance: How much labour did we use compared to what we thought we should have used. Work this out at budgeted costs. Need standard hours = 4,150 X 2 = 8,300 (SH AH) X SR (Standard hours Actual hours) X Standard rate = (8,300 8,250) X 8.00 = 50 X 8.00 = 400 (F)
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Consider interplay of variances how might materials usage/materials price variance, and labour rate/labour efficiency variances affect each other?
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More criticisms
Their main objective is control, with conformance to standards and the elimination of any variances this is seen as restrictive and inhibiting (problem for JIT and TQM systems) Can have adverse effects on performance if the link between cost and activity is not well understood, variances may be out of a managers control Areas of responsibility may not have clear lines of demarcation Even with these criticisms, there are still uses for standard costing and variance analysis for a balanced view read Graham, Lyall and Puxty 1992
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The variances
Total materials variance 36,400 - 39,900 = Materials price variance (4.00 - 3.80) X 10,500 = Materials usage variance (9,100 - 10,500) X 4.00 = Total Labour variance 110,600 - 117,600 = 3,500 (A) 2,100 (F)
5,530 7,000
(A) (A)
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