Standard Costing & Variances

• Standard costing


  Practice of substituting an expected cost for an actual cost in the accounting records
• Standard costing


  The creation of estimated costs for some or all activities within a company
• Variances


  Recorded to show difference between the expected and actual costs
• Types of variances


  • Rate variance (also known as price variance)
  • Volume variance
• Advantages/uses of standard costing

  • Budgeting
  • Inventory costing
  • Overhead application
  • Price formulation
• Disadvantages/problems of standard costing

  • Cost-plus contracts
  • Drives inappropriate activities
  • Fast-paced environment
  • Slow feedback
  • Unit-level information
• Management by exception


  The concept that supports variance analysis - only the most important variances from the planned direction or results of the business matters to managers
• Uses of variance analysis


  • Management by exception
  • Performance evaluation
  • Feedback to planning and control
• Favorable variance


  Variance where standard cost is greater than actual cost
• Unfavorable variance


  Variance where actual cost is greater than standard cost
• Direct materials variances


  1. Material price variance

  2. Material quantity variance
• Direct labor variances


  1. Labor rate variance

  2. Labor efficiency variance
• Factory overhead variances


  1. Spending/budget variance

  2. Efficiency variance

  3. Volume variance
• Types of factory overhead variances

  • Controllable variance
  • Uncontrollable/volume variance
• Types of factory overhead variances

  • Spending variance
  • Efficiency variance
  • Volume variance
• Types of factory overhead variances

  • Variable spending variance
  • Fixed spending variance
  • Efficiency variance
  • Volume variance
• Mix variance


  Deviation from the standard combination of raw materials or labor
• Yield variance


  Deviation from expected output of input components (materials and labor)