Chapter 3:

STANDARD
COSTING &
VARIANCE
ANALYSIS
Group 5
What can standard
costing concepts
do for today's
business?
1 Standard cost

Including
A general model for standard cost
2
variance analysis

3 Direct Materials Variances

4 Direct Labor Variances

5 Manufacturing Overhead Variances

 Including
Variance analysis and management
6
by exception

7 The advantage and Disadvantage

A standard is a benchmark or norm for

Standard
measuring performance

In managerial accounting, standards relate

to the quantity and cost of inputs used in
manufacturing goods or providing services
Costs
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
Management ACTUAL
by Exception quantities, costs

the process of investigating the discrepancy

STANDARD
quantities, costs
Variance Analysis Cycle

Who uses
STANDARD COSTS?
Manufacturing, service, food...
organizations all make use of standards
to some extent

You are likely to run into

standard costs in virtually any line of business
 Setting
IDEAL STANDARD
Standard Cost PRACTICAL STANDARD

can be attained only under are standards that are

the best circumstances “tight but attainable.”

to encourage efficient
future operations

A General Model for Variance Analysis

Compute the direct materials quantity and price

variances and explain their significance.

Direct
Materials
Variances
Direct Materials Variances - An Example

This is the Colonial Pewter Company's standard cost card.

Last month, the company purchased 6,500 pounds of pewter
at a cost of 3.80 dollars per pound. All of the material
purchased was used to make 2,000 pairs of pewter bookend.
Direct Materials Variances Summary
 Direct Materials Variance - A Closer Look

We may also calculate materials variances using formulas :

Direct Materials Variance - A Closer Look
 Who is reponsible for the
Materials Quantity Variance ?
Responsibility The Production Manager
for Direct
Materials
Variances Who is reponsible for the
Materials Price Variance ?

The Purchasing Manager

 Controllability of Materials Variances

The materials variances are not always entirely controllable

by one person or department. For example:

The purchasing manager may purchase lower quality raw materials

resulting in an unfavorable materials quantity variance for the
production manager.

The production manager may schedule production in such a way that

it requires express delivery of raw materials resulting in an unfavorable
materials price variance.
Compute the direct labor efficiency and rate
variances and explain their significance.

Direct
Labor
Variances
Direct Labor Variances - An Example

During June, the company paid its direct labor workers

22,680 dollars , including payroll taxes and fringe benefits,
for 1,050 hours of work. This was an average of 21.60 dollars
per hour.
Direct Labor Variances Summary
 Direct Labor Variance - A Closer Look

We may also calculate labor variances using formulas :

Responsibility for Direct Labor Variances

Mix of skill levels assigned

Production to work tasks.
managers are
usually held Level of employee
accountable for motivation.

labor variances
Quality of production
because they can
supervision.
influence key
factors. Quality of training provided
to employees.
 Controllability of Labor Variances

The labor variances are not always entirely controllable by

one person or department. For example:

The Maintenance Department Manager may do a poor job of

maintaining production equipment. This may increase the processing
time required per unit, thereby causing an unfavorable labor efficiency
variance
The purchasing manager may purchase lower quality raw materials
resulting in an unfavorable labor efficiency variance for the production
manager.
 Variable Manufacturing
Overhead Variances

Manufacturing
Fixed Manufacturing
Overhead

Overhead Variances
Variances
Fixed overhead Variable overhead

Factory managers’

Energy cost salaries

Indirect materials Plant and equipment

Indirect labour depreciation

Equipment repair and
Plant security guards

maintenance insurance and property

taxes for factory

building and equipment

Variable
Manufacturing
Overhead
Variances
Variable Manufacturing overhead
Variable Manufacturing overhead
Variable Manufacturing overhead
Variable Manufacturing overhead
 Fixed factory overhead costs are assigned

to products and services using a standard

Fixed
fixed overhead rate (FR)

Manufacturing
The cause of this variance can be variations

overhead in the method of production, the efficiency of

machines, quality of materials used,machines,

.
improper supervision and inspection
Fixed Manufacturing overhead
 Fixed Manufacturing overhead
Example MicroDrive Corporation Data
Fixed Manufacturing overhead
Fixed Manufacturing overhead
 COMPARED AGAINST THE
RESULTS THAT WERE EITHER
BUDGETED OR PLANED

MANAGEMENT INTERVENES

MANAGEMENT IN DAILY OPERATIONS ONLY

IF THERE IS A DEVIATION

BY
EXCEPTION
EACH DEVIATION WHICH BE
ACCOUNTABLE FOR EACH
SEGMENT IN COMPANY

ALLOWS MANAGERS TO FOCUS

ON THE MOST PRESSING AND
IMPORTANT ISSUES
Varinance Analysis

The technique used to determine whether there is a problem needing

management's attention when managing by exception.
 Advantages
PROJECT MANAGEMENT ACTIVITIES

Estimate the cost of new products accurately

, which lead to significant cost reductions
Enables management to exercise effective
control over production activities, helping
Comparing the standard cost to actual costs,
them make decisions regarding the various
thereby illuminating where wastage occurs
elements of cost
and how to control it

Help to the management determine whether

Emphasis is cost-effectiveness and quality, so
employees are working efficiently or not
proper emphasis is given to improving the
quality of production
Standard costs can greatly simplify
bookkeeping
Opportunities to minimize production costs,
which helps to increase volume of sales and
profits
 Disadvantages
Difficulties determining standards Expensive

The difficulty associated with The process of determine the standard

determining standards for different cost are expensive
activities.

Need for revised standards Not suitable for all producers

The standards must be revised from time It is suitable only for companies in which
to time due to changes in technology, production is uniform and of standard
marketing conditions, and consumer quality. This is because standardization
habits is only possible in such a context.
Thank You
For Your Attention