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Lazy Notes SC Variances

Notes for Management Accounting

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Eriane Mae C. Samane
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19 views4 pages

Lazy Notes SC Variances

Notes for Management Accounting

Uploaded by

Eriane Mae C. Samane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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MANAGEMENT ADVISORY SERVICES

STANDARD COSTS AND VARIANCE ANALYSIS


STANDARD – a measure of acceptable performance established by management as a
guide in making economic decisions. A standard is a benchmark or “norm”
for measuring performance. In managerial accounting, standards relate to
the cost and quantity of inputs used in manufacturing goods or providing
services.

STANDARD COST – pre-determined unit cost which is used as a measure of


performance

STANDARD vs. BUDGET


1. Both standards and budget are pre-determined costs
2. Primary difference: a standard is a unit amount, whereas a budget is a total
amount
 a standard may be regarded as the budgeted cost per unit of product
3. In accounting: except in the application of manufacturing overhead to jobs and
processes, budget data are not journalized in cost accounting
systems, whereas standard costs may be incorporated into cost
accounting systems

ADVANTAGES OF STANDARD COSTS


Standard costs:
1. facilitate management planning;
2. promote greater economy and efficiency by making employees more “cost-
conscious”;
3. are useful in setting selling prices;
4. contribute to management control by providing basis for evaluation and cost
control;
5. are useful in highlighting variances in management by exception;
 Management by Exception – the practice of giving attention only to those
situations in which large variances occur, so that management may
have more time for more important problems of the business, not
just routine supervision of subordinates.

6. simplify costing of inventories and reduce clerical costs

STANDARD COSTING CONTROL LOOP


1. Establishing standards
2. Measuring actual performance
3. Comparing actual performance with standard
4. Taking corrective action when needed
5. Revising standards, if necessary

SETTING STANDARD COSTS


Standards should be set so that they encourage efficient operations.

Ideal vs. Normal Standards:


Ideal Standards – based on the optimum level of performance under perfect
operating conditions
Normal Standards – based on an efficient level of performance that are
attainable under expected operating conditions
STANDARD COST COMPONENTS
1. Standard Price or Rate – the amount that should be paid for one unit of input factor.
2. Standard Quantity – the amount of input factor that should be used to make a unit
of product.
🞵 Both standards relate to the input factors: materials, direct labor, and
factory overhead
Materials:
Price Standard – based on the delivered cost of materials plus an allowance for
receiving and handling
Quantity Standard – establishes the required quantity plus an allowance for waste and
spoilage

Labor:
Price Standard – based on current wage rates and anticipated adjustments (e.g.
C.O.L.A.)
Quantity Standard – based on required production time plus an allowance for
rest periods, clean-up, machine setup, and machine downtime

Manufacturing Overhead:
A standard pre-determined overhead rate is used based on an expected standard
activity index such as standard direct labor hours or standard direct labor cost

VARIANCES:
Static budget variance = actual results – static (master) budget amounts.

Static budget refers to the budget that is set at the beginning of a budgeting
period and that is geared to only one level of activity—the budgeted level of
activity.

Flexible budget variance = actual results – budgeted amounts for the actual level of
activity

A flexible budget is geared to all levels of activity within the relevant range and
is used to plan and control spending. The flexible budget will show the cost
formula for each variable cost and total cost (possibly including fixed costs) at
various levels of activity.

For Materials and Labor:


Price Variance (or Rate, Budget, Spending Variances)
PV = (actual price – standard price) x actual quantity

Quantity Variance (or Usage or Efficiency Variances)


QV = (actual quantity – standard quantity) x standard price

🞵 When production process involves combining several materials in


varying proportions, the materials quantity variance is
supplemented by:

Mix variance:
Total actual quantities at standard prices
Less total actual input at average standard input cost (TAI x
ASIC) Mix variance

Yield variance:
Total actual input at average standard input cost (TAI x
ASIC) Less standard cost (AO x ASOC)
Yield variance
or
Actual output
Less expected output from actual
input Yield difference
x Average standard output
cost Yield variance

For factory
overhead:
Variable overhead variances.

a. The variable overhead spending variance is computed as follows when


the variable overhead rate is expressed in terms of direct labor-hours:

Variable overhead spending variance = (Actual variable overhead rate – Standard


variable overhead rate)  Actual input hours

b. The variable overhead efficiency variance is computed as follows when


the variable overhead rate is expressed in terms of direct labor-hours:

Variable overhead efficiency variance = (Actual hours – Standard hours allowed) 


Standard
Variable Overhead
rate

Fixed Overhead Variances in a Standard Cost System.


a. Budget Variance. The budget variance is the difference between the actual fixed
overhead costs incurred during the period and the budgeted fixed overhead costs
contained in the flexible budget. This variance is very useful in that it indicates
how well spending on fixed items was controlled.

b. Volume Variance. The volume variance is the difference between the total
budgeted fixed overhead and the fixed overhead applied to production.
Alternatively, it can be expressed as the difference between the denominator
level of activity and the standard hours allowed for the output of the period,
multiplied by the fixed portion of the predetermined overhead rate.

The volume variance occurs because the denominator level of activity differs from
the standard hours allowed for production. Thus, an unfavorable variance means
that the company operated at an activity level below the denominator level of
activity.

Conversely, a favorable variance means that the company operated at an activity


level greater than the denominator level of activity.

Under- and Overapplied Overhead. The sum of the four manufacturing overhead
variances—variable overhead spending, variable overhead efficiency, fixed overhead
budget, and fixed overhead volume—equals the under- or overapplied overhead for
the period.

Management Uses of Variances


Managers and management accountants use variances:
a. to evaluate performance after decisions are implemented, to trigger
organization learning, and to make continuous improvements.
b. variances serve as an early warning system to alert managers to existing
problems or to prospective opportunities.
c. Variance analysis enables managers to evaluate the effectiveness of the
actions and performance of personnel in the current period, as well as to
fine-tune strategies for achieving improved performance in the future. To
make sure that managers interpret

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