Variance Analysis Topic Six by Dr. Ong Tze San

Standard Costs Standards are benchmarks or “norms” for measuring performance. Two types of standards are commonly used. Quantity standards specify how much of an input should be used to make a product or provide a service. Cost (price) standards specify how much should be paid for each unit of the input.

Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production. Setting Standard Costs

Setting Direct Material Standards Price Standards Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts. Quantity Standards

Setting Direct Labor Standards Rate Standards Often a single rate is used that reflects the mix of wages earned. Time Standards Use time and motion studies for each labor operation.

Setting Variable Overhead Standards Rate Standards The rate is the variable portion of the predetermined overhead rate. Activity Standards The activity is the base used to calculate the predetermined overhead.

Price and Quantity Standards Price and quantity standards are determined separately for two reasons:  The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.  The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.

A General Model for Variance Analysis Variance Analysis Price Variance Difference between actual price and standard price Quantity Variance Difference between actual quantity and standard quantity

Variance Analysis Price VarianceQuantity Variance Materials price variance Labor rate variance VOH spending variance Materials quantity variance Labor efficiency variance VOH efficiency variance A General Model for Variance Analysis

(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

Variances: Using the Factored Equations Materials price variance MPV = AQ (AP - SP) Materials quantity variance MQV = SP (AQ - SQ) Labor rate variance LRV = AH (AR – SR Labor efficiency variance LEV = SR (AH - SH) Variable manufacturing overhead spending variance VMSV = AH (AR - SR) Variable manufacturing overhead efficiency variance VMEV = SR (AH - SH)

A Statistical Control Chart Variance Measurements Favorable Limit Unfavorable Limit Warning signals for investigation Desired Value Exh. 10-9