Session 11

Accounting - 1

Accounting – Standard Costing and Viariance Analysis

Concepts
Standard Cost - Basics
 Based on carefully predetermined amounts.
 Used for planning labour, material and overhead requirements
 The expected level of performance
 Benchmarks for measuring performance
 Accountants, engineers, personnel administrators and production
managers combine efforts to set standards based on experience and
expectations.
 Practical Standards vs. Ideal Standards
o Practical: Should be set at levels that are currently attainable with
reasonable and efficient effort
o Ideal: Based on perfection and but are most likely to be
unattainable and discourage most employees.
Direct Material Price Standards (cost of
Quantity Standards
Standards delivered material) (how much quantity
needed to produce a
product)
Direct Labour Standards Rate Standards (use Time Standards (time
wage surveys, labour and motion studies for
contract) each labour operation)
Variable Overhead Rate Standards (variable Activity Standards (base
Standards portion of the predeter. used to calculate the
Overhead rate) predeterm. Overhead)

 Difference: Standards and Budgets are not the same!

o A standard is the expected cost for one unit.
o A budget is the expected cost for all units.
 Session 11
Accounting - 2

Variances - Basics
 Important to know because they point to causes of problems and
directions for improvement.
o Also, they trigger investigations in departments having
responsibility for the incurred costs.

Calculations
 General Model
 Session 11
Accounting - 3

 Its all the same but with different terminology

o Material variance
 Actual/Standard Quantity
 Actual/Standard Price
o Labour variance
 Actual/Standard Hours
 Actual/Standard Rate
o Variable manufacturing overhead variance
 Actual/Standard Hours
 Actual/Standard Rate
 Exception, be careful!
o “How are the variances computed if the amount purchased differs
from the amount used?”
o Purchased: Used for price variance
o Used: quantity variance
Focus, Advantages & Disadvantages
 On what variances should you focus on?
o Larger variances in monetary term or as a percentage of the
standard should be investigated first.
 Advantages/Disadvantages
Advantages Disadvantages
Possible cost reduction Negativity bias may impact moral
Management by exception Misinterpretation of (F) variances
Cost control & performance Continuous improvement vs. meeting
evaluation standards?
Information for planning and decision Empahsize on standards may exclude
making other objectives
Labour quantity standards &
efficiency variances may not be
appropriate
St. cost reports may not be timely