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Understanding Standard Costing Variances

Standard costing involves calculating variances based on standard amounts set in the budget compared to actual results. The key variances are: 1. Materials price variance which compares the actual quantity purchased times the actual price to the actual quantity times the standard price. 2. Labor rate variance which compares the actual hours worked times the actual pay rate to the actual hours worked times the standard pay rate. 3. Controllable factory overhead variance which compares the actual overhead costs to the flexible budget for overhead that includes fixed overhead plus a variable overhead rate times actual units produced.

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272 views2 pages

Understanding Standard Costing Variances

Standard costing involves calculating variances based on standard amounts set in the budget compared to actual results. The key variances are: 1. Materials price variance which compares the actual quantity purchased times the actual price to the actual quantity times the standard price. 2. Labor rate variance which compares the actual hours worked times the actual pay rate to the actual hours worked times the standard pay rate. 3. Controllable factory overhead variance which compares the actual overhead costs to the flexible budget for overhead that includes fixed overhead plus a variable overhead rate times actual units produced.

Uploaded by

Jon Leins
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

Standard Costing

Definitions
“Standard/Budgeted Amount” = Set @ beginning of year (in Master Budget)
“Applied/Flexible Overhead” = (Std VOH rate) x (Flexible budget hrs, based on actual production)

Materials Price Variance = AQ(AP – SP)


Quantity Variance = SP(AQ - SQ)

Fixed O/H Volume Variance = Budgeted FOH (master budget) – FOH applied (std FOH rate *std
hours based on actual activity output)
• i.e. -> Measures how actual output compares with what was budgeted

Unfavorable = Dr.
Favorable = Cr.

Big Six Variances (Top > Bottom = Unfavorable)


1. Materials Price Variance (based on purchases)
a. (AQ purch x AP) compared to (AQ purch x SP)

2. Materials Usage Variance


a. (AQ used x SP) compared to (SQ x SP)
b. AQ used = output x DM required per unit

Total Material Variance -> Combine Material Price/Usage


3. Labor Rate (Price) Variance
a. (Act hours worked x AP) compared to (Act hours worked x SP)

4. Labor Efficiency (Usage) Variance


a. (Act hrs worked x SP) compared to (Std hrs scheduled x SP)
b. Std hrs scheduled = (Output x labor hours per unit of output)

Total Labor Variance -> Combine Rate/Efficiency Variances


5. Controllable Factory OH Variance
a. Factory OH is both variable and fixed
b. Factory OH represents all indirect manufacturing costs
c. Flexible Budget = Fixed + (VOH rate * Actual hours)

Two-way Analysis of Factory O/H Example


Controllable O/H Variance (Fixed & Variable)

Actual overhead costs (given) = $16,500

Standard Hours Flexible Budget for OH = (Fixed + VOH rate*units produced)


Volume O/H Variance (Fixed O/H ONLY is under/over applied)
Overhead Applied to WIP = (Predetermined rate * Standard hours that are budgeted)

Three Way Analysis of Overhead Variance


• Spending
• Efficiency
• Volume

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