1. 1 Module 22 Standard Costs and Variance Analysis

2. 2 Standard Costing Definition: Standard costs are benchmarks for the cost of a product, process, or subcomponent. Used for Planning and Decision Making: Standards can be better predictors of future costs than actual past costs. Can be used in product pricing, bidding, and outsourcing decisions. Used for Controlling Operations: Set performance expectations. Variances from standards get attention of managers. Management by exception - investigate variances. Ideal versus Practical Standards: Ideal - attained at near perfect conditions. Practical - set at near normal, efficient operations (better motivator).

3. 3 Variances and Flexible Budget Variances measure the difference between actual and standard costs: Favorable (F) variance, if actual < standard. Unfavorable (U) variance, if actual > standard. Note: variances may also be calculated for sales, but the interpretation is reversed. For best interpretation, we need to calculate the flexible budget for each activity. Flexible budget is defined as: Actual Activity * Standard Price FB is necessary to decompose variances into price and quantity components, and allows managers to investigate the components.

4. 4 Format for Variance Analysis Symbols: AQ = Actual quantity used; SQ = Standard quantity allowed; SP = Standard price per unit; AP = Actual price per unit. Total Flexible budget Total actual based on standard cost actual input cost AQ AQ SQ x AP x SP x SP |______________________| |___________________| AQ  (AP - SP) (AQ - SQ)  SP Price variance Quantity variance |____________________________________________| (AQ  AP)  (SQ  SP) Total variance

5. 5 Direct Labor Variance Symbols:AQ = Actual quantity of hours used; SQ = Standard quantity of hours allowed; SP = Standard wage rate per hour; AP = Actual wage rate. Total Flexible budget Total actual based on standard cost actual input cost AQ AQ SQ  AP  SP  SP |_____________________| |___________________| AQ  (AP - SP) (AQ - SQ)  SP Rate variance Efficiency variance |_____________________________________________| (AQ  AP)  (SQ  SP) Total flexible budget labor variance

6. 6 Interpreting Direct Labor Variances Large variances in either direction indicate performance is not as planned, due to either poor planning, poor management, or random fluctuation. Unfavorable rate variance: Could indicate overtime had to be paid, depending on how overtime is accounted for. Workers were not available at lower rates. Unfavorable wage rate variance with favorable efficiency variance: Higher-paid workers performed work more efficiently. Favorable wage variance with unfavorable efficiency variance: Lower-paid workers performed work less efficiently.

7. 7 Direct Materials Variance (assumes quantity purchased equals quantity used) Symbols:AQ = Actual quantity of materials used; SQ = Standard quantity of materials allowed; SP = Standard price per unit; AP = Actual price per unit. Total Flexible budget Total actual based on standard cost actual input cost AQ AQ SQ  AP  SP  SP |_____________________| |___________________| AQ  (AP - SP) (AQ - SQ)  SP Price variance Quantity variance |_____________________________________________| (AQ  AP)  (SQ  SP) Total flexible budget material variance

8. 8 Interpreting Direct Materials Variances Price variance - usually as a result of purchasing department, but other factors may intervene Quantity variances - usually as a result of production, but other factors may intervene. Unfavorable price variance with favorable quantity variance: Higher priced materials may have less flaws, increase production efficiency and and decrease the use of materials quantity. Favorable price variance with unfavorable quantity variance: Lower priced materials may cause increased use of materials and production problems; may also affect labor efficiency.

9. 9 Variable Manufacturing Overhead Variance Total Flexible budget Total actual based onstandard VMOH actual use cost costs AQ AQ SQ x AP x SPx SP |____________________| |___________________| (AP – SP) AQ (AQ - SQ)  SP Spending varianceEfficiency variance |___________________________________________| (AQ x AP)  (SQ  SP) Total Variable MOH variance