STANDARD COSTING AND VARIANCE ANALYSIS STANDARD COSTING = practice Of substituting an expected cou for an actnal corr in the accounting records jnvolves the creation OF estimated corts for come or alt activities wlin a company 1m Swiotequentty. variances are recorded fo chow the difference between the expected and attwal cory tein ion = hal nr Abel bes DISADVANTAGES see king = ON dependent on eendort cts % Cott: plac contracts My tate cot, 3 imag casting ~ yae"ine"doowiaent ns X Driver inappropriate activitige mor oe cp ¥ Overhead application — aineaten % Fast-paced environment — Ms cnange! boon % Price Forrnataton > snr tatu Slow Teedoack > Merman nen mado abe v Benechmarte for performance. ‘(valuation % Unit Level information — "zig of ddan, mating SYANDARD totT VARIANUES the difference bewcen the actal cot incurred and the standard Cott against which it 1S measured — Cost varioncer ‘Actnal > Standard = untavorabre (i) Actual € Standard = Favorate () - A variance can also be wied te measure the difference between actnal and expected saler & Sales variance = Variance analysis con be used to review te performance of both revenue ond cxpence! tdentify. _—— Receive Take corrective ‘Auestions explanation *|__ actions Analyze Conduct next variances periods operations Prepare standard , Eee Cou performance Begin, Budgeting 7 painted fo acl ett (gear tod) FFledible budael revenue fe parent tg Tegmeat manager ¥ antic budget The difference ik # revenue variance Ketwal tush Flee budget cost v The difference 1 cor varance ated of "Shanon Wy en only dgnificant variances need be analyzed phic anagement we fer perfermance evaluation. ft is intended fo measure EFFECIIVENESS and fad Coke of ded staan Finke came 8) Feedback for planning and controlLon vrien's sete = Only absorption carting records production colt variances although Variances ane analy zed based Qecording 10 tot behavior = vovianges me Yecorded in the bones THE FOUR COMT sysTEMS Materiau Labor ourrhead sain Tac ot Actwal APXAQ | ARKAH Actnal B eno sfavdaud, Wormal AP KAQ ARK AH © RK AH aighsa misono | Extended normal CFesibte Budget) SPKAQ SRXAH SR OX AH v Standard 4 v FAVORABLE VS. UNFAUORASE Met Income Coot Revenue Unfavorable Decrease Ars ACS Analyst of vaviance Ww Production variance ore analyzed to determine corrective attons and fo improve Operational efficiency + net anahyaed | = deviation frm budgeted hour avoitable Against stanclard hourt altowed / actual Comumption atjained = Measurement of economies of scale > wo- of unitt reduce, | the fixed OH Junit = favorable < no: of unite praduce, t tre fived OW | unit - volume variance tealtat_ thal = analyzed in revenue vavinncet (ale volume Vaviance) <— quantity < marker the _ sales mie W When anatping vaviances, understand the Camit of a variance before using It as a performance measure Ww Avoid excescive emphacic On a cingle performance measure. Alwaye tancioer poctible inter- dependencics among variancer and do net interpret them in isvta| each other —* cloged 10 COGS + wnat treatment (omblem ie cient) clored wip Be. Cous, Fe BE \ management’ prorogative G depinds on company policy PRICE AND GMANTITY FACTOR C ohgtien EEE en Fas] — Pri variance [BMantity Variane] I 4 AP - SPX AG AQ-50 * SPPRICE FACTOR = deviation fm aamat prict [rae againt candard price] rate @) input: price variance | rate voriance b) Samples ave materiale Price variance, Labor Rate Variance, OH (pending Vavinnce (variable & Fixed) "GENERAL MODEL FOR VARIABLE OCT VARIANCES (pm, DL, v-OH) Actal Quantity xi Achal Quantiy => Clandard Quantity * my x ay ie Actnal Price + _ Standard Price Stancarh Mice “eal et Fleviei beget ‘Static wage Price variance Quantity Vowiance Aciwat Budget of Standard Quantity Fixed 0H x x Sandard Price, Gandavd price Tete Budge Teck ‘Svcd Fed Price voriance Quantity Variance QANTITY FACIOR = deviation trom achal consumption of inpat components againt whal candard| budget allow. @) known a usage tfticienoy variable b) Hitand Yield Variances occur if « company ures a combination of raw wraterial or labor €) Samples are Materials Price Variance. Labor Rate Variance, Overhead Efficiency, and Volume/ capacity , Price factor Prycical Factor vaviable cost Direct materials © Materials Price variance D Material Quentity Variance Direct Labor » Labor Rate Variance » Labor Géficieney variance Vaviable OH 1p Oierhead Spending Varience, » Werhtad GfFicluney Vaviance Fived cat Fixed OH wm Overhead Spending variance pOierhead voume | Capacity Variance JOURNAL ENTRIES cage x Raw Materials (5? x Ao) Accounts Payable (AP x AG) Material Price Vowiance (AP- SP) x AG “Iscuance of Raw Materials te WIP Work in Press (sp x 60) mw Matteriale Quantity Vawiance (AG-S@) x SP XK =» unfavorable = deat Raw Mateniale (SP x AQ) me u beer Gout, deerente Ni 2s alanye nett Xx + Favorable © credit act; nerente NE Cloting tty: Materials Price Vaviance Materials Quantity varance coowork in prcece (cP x fH) ~ Labor Rate Variance (Ag ~ cr) x AH rd Wages Payable (AP x AH) a Lavor Effideney Variance (AH -sH) x SR ~ Goting entry: = cour x genie Lovoor efficiency variance w Lavor Rate Variance % Factoy OW (combat account) © Caih/ AP/ Appapriate Acct. ~~ wip « Applicd OH me Closing entry: ted OH we ‘verneaa voviowcer record namie iF matr oregon poate FOH ” wpe COMPLENDN OF WIP > Fo REMINDERS = Fo ~ * Unfavorable variance: are debited while favomble wip w variances ave credited * Thevomances are cloced ty Cour Hf inignificant, ne and fh Cob, FG, aw wiP if Significart AB/cath = xk a hedatal © COLL rusgnind ot the prit of sale i bored on Standard Cane w © CGS will be adjuited te Achat owly when all variances are duced cout ” © The journal evbiet are the primary murce of formula Fo ”v ured "in van ance analytic. DIRECT MATERIAL VARIANCE (Quanti Direct material vavionce price wage, purchase price, mit and yield) @) Materials Price Vowiance — pucnasing manager = CActwal Price ~ Standard Price) x Actal Quantity = Actwai Total Materia Cat - Flexible Budget Allowed b) fia) Quanbty Vairiay = (Acta Quality ~ Standard Quantity) x Standard Price = preduvion manager DIRECT LABOR VARIANCE ( efficiency, vate. mix and yield ) = arices when He octal coct ) Labor Rale Variance, — Hinman euowee = (Actnal Rate - Standard Rate) x Achal Hour = Acmal Total Pay nll - Frevitke Budget Allowedb) Labor Effiency Variance —* Prducton Manager | He = (Acwal Hour - Standowd Hout) x dtandlard Labor Rate F Flexive Buda - Static Budget MIKED AND YIELD = the Quantity or Efficimay vanante can be divided int Mix and Yield variance if a © company Uiey More than one raw Mndiesial OF combination of worket hy finith w praduet daiation frm the dandard cembinaton raw weictialt or labor = (Actual Mix f+ - Gandara mix j-) X Total Acmal Conrumpton X Slandora Rate ulation trom oxpeckea vutpot of input component. 1¢ material ana labor ‘Total Actwal Consumption Total {tandowd Consumpkon) X Swix’ x Rate FACTORY OVERHEAD VARIAN CE = refere to the difference between actal OH and applied (standard) OH. You can only compute OH variance after you know the aclwal OH corte for the period wnfavovalte favorable ‘Actal - Applied = underapplied | overapplicd OW () o Gandardy 4 Coos T Coos aed OVERHEAD VARIANCES - 4 way Variable Spending Actwal Variable OH - Flexible Budget oH = (AR x Ales) — ($8 x AHrr) gpa? © Noviabie EXfi cien = (AH SH) * Standard Variable OH Rate = BAAH — BASH tangy Mie FIXED OVERHEAD WARIANCES — YWAy @® Fived spending = Actual Fixed OH — Budgeted Fited Of @ Volume capacity vowiance. ic = Budgdled Fixed OH - Standard Fixed Ot = (Blirs - CHIT) x td Fixed OH Rote = BASH ~ Standard Cort REE WAY ANALYSI! 1G Spending Variance = Vdriawe Spending + Fixed Spending + Total Achal Factory 0H — BAAH 8 Variable Efficioney Yoviane Capacity or Volume TWO WAY ANALYSIS ® ee javiable ipending + Fixed Cpending + Vaviable Efficiency! otal Actwal Faulry OH — BASH Volume! CapacityVariance Analysis Actual < Standard = Favorable (-) Actual > Standard * Unfavorable (+) Direct material AP X/AG|) watealt Price Variance (AP-SP) x AG Ay xiely Maievial Quanity Variant, (AQ-S@) x SP Direct Labor ae x i J labor Rate variance (AR-sk) x AM se x GH | Labor Efichenoy variance CAH x SH) * SR OVERHEAD away 3 way 2 WAY 1 way Variable Fixed Sa a ata a Actual [AVR XAH |+/AFRX AH] 7 spending variance i BAAH sue XH +] BFE |) Epticiency variance | Contrllable variance be Overhead BASH SVR ¥ SH + BFC ‘ i Variance ‘handerd | SwR x SH # [SFR EH J Volume variance J uncentrilable variance FINANCIAL PLANNING AND BuDGer¢ Planning budget ~ prepared before ihe period leegins and is valid for only the planned level of activity Gatic budge - bacis from which actual reculte are tamparea. Resulting variance is called tate budget variance Flevible budget - estimate of what revenues and cocts chould have bem, given the actual level of achvity far the period. Fladble budget variance — difference between the reculir generated bya flevivle londget model and actwal recut: Difference between atic and Flexible budget —= volmme variances (revenue wwiance)