STANDARD COSTING VARIANCE ANALYSIS

• A primary purpose of using a standard cost system is to provide a distinct measure of cost control.
• If properly used, standards can help motivate employees.
• Control costs is a purpose of standard costing
• When evaluating the operating performance managementsometimes uses the difference between expected and actual performance. This refers to: Management by Exception
• A company employing very tight (high) standards in a standard cost system should expect that most variances will be unfavorable
• To measure controllable production inefficiencies, engineering estimates based on attainable performance is the best basis for a company to use in establishing thestandard hours allowed for the output of one unit of product
• Ideal standards demand maximum efficiency which may leave workers frustrated, thus causing a decline in performance.
• A difference between standard costs used for cost control and the budgeted costs representing the same manufacturing effort can exist because standard costs represent what costs should be while budgeted costs represent expected actual costs.
• The fixed overhead application rate is a function of a predetermined “normal” activity level. If standard hours allowed for good output equal this predetermined activity level for a given period, the volume variance will be zero
• Theoretical Standard - the absolute minimum cost possible under the best conceivable operating conditions
• Ideal Standards - standard which are difficult to achieve due to reasons beyond the individual performing the task,
• Standards that represent levels of operation that can be attained with reasonable effort are called normal standards.
• A company uses a two-way analysis for overhead variances: budget (controllable) and volume. The volume variance is based on the fixed overhead application rate
• Assuming that the standard fixed overhead rate is based on full capacity, the cost of available but unused productive capacity is indicated by the factory overhead cost volume variance
• In analyzing manufacturing overhead variances, the volume variance is the difference between the: Budget allowance based on standard hours allowed for actual production for the period and the amount budgeted to beapplied during the period.
• The variance least significant for purposes of controlling costs is the: Fixed overhead volume variance
• The choice of production volume as a denominator for calculating its factory overhead rate has no effect on the fixed factory overhead budget variance
• The budgeted overhead costs for standard hours allowed and the overhead costs applied to product are the same amount for variable overhead costs.
• Production department is customarily held responsible for an unfavorable materials usage variance
• The variance most useful in evaluating plant utilization is the: Fixed overhead volume variance
• The choice of production volume as a denominator for calculating its factory overhead rate has no effect on the fixed factory overhead budget variance
• The budgeted overhead costs for standard hours allowed and the overhead costs applied to product are the same amount for variable overhead costs.
• Favorable fixed overhead volume variance occurs if: production is greater than planned
• The budget variance for fixed factory overhead for the normal volume, practical-capacity, and expected-activity levels would be the same for all three activity levels
• You have leased a 5,000-gallon storage tank for P5,000 per month. You stored 4,000 gallons of liquid in the tank during the month. The cost of storage was P1.25 per gallon, rather than P1.00 per gallon based on 5,000 gallon capacity. Therefore, the cost of storing 4,000 gallons was P1,000 more (P.25 x 4,000) in total than if you had stored 5,000 gallons of liquid in the tank. Which variance is being described? Fixed-overhead volume variance
• Favorable fixed overhead volume variance occurs if production is greater than planned