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# Standard Costing and Variance Analysis:

1. Definition and Explanation of Standard Cost:

A standard cost is the predetermined cost of manufacturing a single unit or a number of product units during a specific period in the immediate future. It is the planned cost of a product under current and/or anticipated operating conditions. Click here to read more.

2. Purposes and Advantages of Standard Costing System:

Standard costing systems help in planning operations and gaining insights into the probable impact of managerial decisions on cost levels and profits. Click here to read more.

3. Setting Standards:

Calculation of a standard cost is based on physical standards, two types of which are often discussed, a basic standard and current standards. Click here to read more.

4. Materials Price Standard:

Usually two standards are set for direct materials costs. These are:

5. Materials Price Variance:

When actual price paid for the materials is more or less than the standard price of the materials, the difference is called direct materials price variance. Click here to read more.

6. Materials Quantity Standard:

Materials quantity standard is also called materials usage standard. This standard is normally developed from materials specifications prepared by the departments of engineering (mechanical, electrical, or chemical) or product design.

7. Materials Quantity Variance:

Materials quantity variance is computed by comparing the actual quantity of materials used with the standard quantity of material allowed, both priced at standard cost. If actual quantity used is more than the standard quantity allowed to produce a particular number of units, the variance is called unfavorable materials quantity variance. Click here to read more.

8. Direct Labor Rate Standard:

The standard rate per hour for direct labor includes not only wages earned but also fringe benefits and other labor costs. Click here to read more.

9. Direct Labor Rate Variance:

The price variance for direct labor is commonly termed as labor rate variance. This variance measures any deviation from standard in the average hourly rate paid to direct labor workers. Click here to read more.

10. Direct Labor Efficiency Standard:

Setting direct labor time or efficiency standard means computing the labor time required to complete a unit of product. The establishment of labor time standard or labor efficiency standard is a specialized function. Click here to read more

11. Direct Labor Efficiency Variance:

Labor efficiency variance is calculated by comparing the actual hours worked with standard hours allowed, both at the standard labor rate. The standard hours allowed figure is determined by multiplying the number of direct labor hours established or predetermined to produce during the period for which the variances are being computed.

The standard factory overhead rate is a predetermined rate that is usually based on direct labor hours. Other bases may also be used, e.g., direct labor dollars or machine hours. Click here to read more.

13. Overall or Net Factory Overhead Variance:

Jobs or processes are charged with with costs on the basis of standard hours allowed multiplied by the standard factory overhead rate. Click here to read more.

The controllable variance is the difference between actual expenses incurred and the budget allowance based on standard hours allowed for work performed. This variance may be favorable or unfavorable. Click here to read more.

The Volume variance represents the difference between the budget allowance and the standard expenses charged to work in process. Click here to read more.

Overhead spending variance is the difference between actual expenses incurred and the budgeted allowance based on actual hours worked. Click here to read more.

Overhead Idle capacity variance is the difference between the budget allowance based on actual hours worked and actual hours worked multiplied by the standard overhead rate. Click here to read more.

Overhead efficiency variance is the difference between the actual hours worked at standard rate and overhead charged to production (standard hours allowed at standard rate). Click here to read more.

Variable overhead efficiency variance is the difference between budget allowance based on actual hours worked and budget allowance based on standard hours allowed. Read more.

Fixed overhead efficiency variance is calculated is as follows:

21. Mix and Yield Variance:

Basically, the establishment of a standard product cost requires the determination of price and quantity standards. In many industries, particularly of the process type, materials mix and materials yield play significant parts in the final product cost, in cost reduction, and in profit improvement. Read more.

22. Variance Analysis Example:

23. Standard Costing and Variance Analysis Formulas:

24. Management by Exception and Variance Analysis:

Variance analysis and performance reports are important elements of management by exception. Simply put, management by exception means that the manager's attention should be directed toward those parts of the organization where plans are not working out for reason or another. Click here to read more

25. International Uses of Standard Costing System:

Standard costing system is used by companies worldwide. A comparative study of cost accounting practices found that three-fourth of the companies surveyed in the United Kingdom, two-third of the companies surveyed in Canada, and 40% of the companies in Japan used standard costing system. Click here to read more

The use of standard costs is a key element in a management by exception approach. If costs remain within the standards, Managers can focus on other issues. When costs fall significantly outside the standards, managers are alerted that there may be problems requiring attention. Click here to read more

A D V E R T I S E M E N T

 Financial Accounting Topics Introduction to Accounting ---------------------------------------------------------------------------- Transactions and Accounting Equation ---------------------------------------------------------------------------- Analysis of Business Transactions ---------------------------------------------------------------------------- Journal, Ledger and Trial Balance ---------------------------------------------------------------------------- Accounting for Bills of Exchange ---------------------------------------------------------------------------- Special Journals ---------------------------------------------------------------------------- Cash Book ---------------------------------------------------------------------------- Bank Reconciliation Statement ---------------------------------------------------------------------------- Final Accounts ---------------------------------------------------------------------------- Work Sheet ---------------------------------------------------------------------------- Capital and Revenue Items ---------------------------------------------------------------------------- Valuation of Inventories ---------------------------------------------------------------------------- Accounts of Non-profit Making Organizations ---------------------------------------------------------------------------- Statement of Cash Flows ---------------------------------------------------------------------------- Accounting Ratios Analysis ---------------------------------------------------------------------------- Depreciation, Provisions and Reserves ---------------------------------------------------------------------------- Accounting Dictionary ---------------------------------------------------------------------------- Financial Calculators

 Managerial Accounting Topics Financial Statements ---------------------------------------------------------------------------- Cost Volume Profit Relationship ---------------------------------------------------------------------------- Variable Costing System ---------------------------------------------------------------------------- Materials and Inventory Cost Control ---------------------------------------------------------------------------- Activity Based Costing System ---------------------------------------------------------------------------- Standard Costing and Variance Analysis ---------------------------------------------------------------------------- Balanced Scorecard ---------------------------------------------------------------------------- Capital Investment Analysis/Capital Budgeting

A D V E R T I S E M E N T