A standard cost system is one in which a company sets cost standards and then uses them to evaluate actual performance. A variance is the difference between actual performance and the standard.Why is Standard Costing Used? A standard is a pre established benchmark for desirable performance. 2 .

An unfavorable variance occurs when actual performance falls below the standard. 3 .Favorable versus Unfavorable A standard is a preestablished benchmark for desirable performance.

4 .Management by Exception Management by exception is the process where managers focus their attention on those areas where actual performance deviates from standards.

Quantity and Price Standards Quantity used Price paid 5 .

Determine which variances to investigate. Investigate the cause of variances.The Standard Costing Process Gather information and set standards. Determine if corrective action is needed. Take corrective action. 6 . Compare actual performance to standard and prepare performance reports.

Standard Costing Variances Material Variances Standard Cost Variances Labor Variances Overhead (Indirect Costs) Variances Price Quantity Rate Efficiency Spending Efficiency Budget Volume 7 .

Variances Favourable variance = AC < SC Unfavourable variance = AC > SC 8 .

Material Cost Variance Material Price Variance Material Usage/yield Variance Material Mix Variance Material Yield Variance 9 .

The direct materials quantity variance (also called the usage variance) is a measure of the amount of materials used. The direct materials price variance is a measure of the cost to buy the various materials that were purchased. 10 .Material Cost Variances MCV is the difference between the standard cost of materials allowed (standard) for the output achieved and the actual cost of material used.

MCV = SC ± AC (SQ x SP) ± (AQ x AP) MPV = AQ (SP ± AP) MUV = SP (SQ ± AQ) MMV = SP ( SQ ± AQ) or (RSQ ± AQ) MCV = MPV + MUV MCV = MPV + MMV + MYV MYV = SOP (AY ± SY) 11 .

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