Summary

Explain How and Why a Standard Cost Is Developed

• Standards are budgeted unit amounts for price paid and amount used.
• Variances are the difference between actual and standard amounts.
• A favorable variance is when the actual price or quantity is less than the standard amount.
• An unfavorable variance is when the actual price or amount is greater than the standard amount.

Compute and Evaluate Materials Variances

• There are two components to material variances: the direct materials price variance and the direct materials quantity variance.
• The direct materials price variance is caused by paying too much or too little for material.
• The direct materials quantity variance is caused by using too much or too little material.

Compute and Evaluate Labor Variances

• There are two labor variances: the direct labor rate variance and the direct labor time variance.
• The direct labor rate variance determines if the rate paid is greater than or less than the standard rate.
• The direct labor time variance determines if the actual hours used are greater than or less than the standards that should have been used.

Compute and Evaluate Overhead Variances

• There are two sets of overhead variances: variable and fixed.
• The variable variances are caused by the overhead application rate and the activity level against which the rate was applied.
• The variable overhead rate variance is the difference between the actual variable manufacturing overhead and the variable overhead that was expected given the number of hours worked.
• The variable overhead efficiency variance is driven by the difference between the actual hours worked and the standard hours expected for the units produced.
• There are two fixed overhead variances. One is caused by spending too much or too little on fixed overhead. The other is caused by actual production being above or below the expected production level.

Describe How Companies Use Variance Analysis

• The key to analyzing variances is to determine why the variance occurred.
• If a company cannot determine why there is a variance, it will not know if the variance is indicative of a problem or not.
• All firms—manufacturing, retail, and service—use standards and variances.