Standard Costing and Variance Analysis

Standard cost- no. of inputs required for output, more on per unit, what should the company incur
Inputs- how much materials, labor, or overhead

Variance analysis- the time that we compare budget with the actual during period of evaluation
Standard cost system-

Actual costing- materials, labor, and overhead are in actual

Normal costing- materials, labor are in actual while overhead are predetermined
Standard costing- materials, labor, and overhead are predetermined

Sources of Standard cost

 Activity Analysis
 Historical Data (least expenisve)
 Benchmarking
 Target Costing (considering market price)

Management by Exception
Management focus time in areas where there are problems, as identified by the fact that there is a
variance from the standard. Investigate material or significant variance only, and both favorable and
unfavorable variance.

Variance Analysis Cycle

Practical standard
Ideal Standard Identify root
causes

Raise
Take actions
questions

Conduct next
Analyze period's
variances operations
Begin

Prepare
performance
report

Static vs. Flexible budget

 Static Budget- the one prepared for one specific level of planned activity and that level of
planned activity does not change

 Flexible Budget- the one that shows amount that is adjusted to the actual level of activity that
has occurred
Characteristics of Flexible Budgets
 May be prepared for any activity level in the relevant range
 Show costs that should have been incurred at the actual level of activity
 Help managers control costs
 Improve performance evaluation

How a flexible budget works

 Total Variable costs change in direct proportion to changes in activity
 Total Fixed costs remain unchanged within the relevant range

REVENUE VARIANCE- difference between actual revenue and flexible budget revenue
Greater actual= Favorable
SPENDING VARIANCE- difference between the actual cost and flexible budget cost
Greater actual= Unfavorable
Standard Costs
Two types of standards:
 Quantity Standards- specify how much of an input should be used to make a product or
provide a service
 Price Standards- specify how much should be paid for each unit of the input

Setting Direct Materials Standards

 Standard Quantity per unit- bill of materials
 Standard Price per unit- final, delivered cost of materials, net of discounts

Setting Direct Labor Standards

 Standard Hours per unit- use time and motion studies for each labor operation
 Standard Rate per hour- often a single rate is used that reflects the mix of wages earned

Setting Variable Manufacturing Overhead Standards

 Quantity Standard- the activity in the allocation base for predetermined overhead
 Price Standard- variable portion of the predetermined overhead rate

Using standards in flexible budgets

Standard costs per unit for direct materials, direct labor and variable manufacturing overhead can be
used to compute activity and spending variances- become more useful by breaking down into price
and quantity variances

Overhead variances
 Actual- Actual FOH, Actual VOH
 BAAH- budget allowed based on actual hours
 BASH- budget allowed based on standard hours
 APPLIED- standard FOH, standard VOH