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STANDARD COSTING

AND
VARIANCE ANALYSIS
JBCG
Introduction
◦Standard is a performance benchmark.
◦Businesses set standards for employee sales
expenses; pizza restaurants set standards to
prepare and bake pizza; and casino set standards
for revenue to be generated per square foot of
playing space.
Use of Standard Cost Systems
◦Motivating
◦Planning
◦Controlling
◦Variance analysis is the process of categorizing the
nature of the differences between actual and
standard costs.
◦Decision Making
◦Performance Evaluation
Considerations in Establishing Standards
◦Appropriateness
◦Attainability
◦Expected Standards
◦Practical Standards
◦Ideal Standards
Dev’t of Standard Cost System
◦Material Standards
◦Type of material needed
◦Quality (grade) of material needed
◦Quantity of material needed
◦Price per unit of material
◦Bill of materials – the specifications for materials.
◦Total cost of ownership (TCO) – includes price,
freight, duty, tax charges, payment and discount
terms, inventory storage costs, etc.
Dev’t of Standard Cost System
◦Labor Standards
◦Methods-time measurement – an industrial
engineering process that analyzes work tasks to
determine the time a trained worker needs to
perform a given operation at a rate that can be
sustained for an eight-hour workday.
◦Operations flow document – lists all tasks necessary
to make one unit of product or perform a specific
service.
Dev’t of Standard Cost System
◦Overhead standards
◦Most appropriate costing information will result when
(1) overhead is assigned to separate cost pools based
on cost drivers and (2) allocations are made using
activity drivers directly related to the Overhead costs
being assigned
◦Standard cost card is prepared that summarizes the
standard quantities and costs needed to produce a
unit.
General Variance Analysis Model
◦Total Variance
◦Price/Rate Variance and Quantity/Efficiency
Variance
Material Variance
◦Material Price Variance
◦Material Quantity Variance
◦Point-of-Purchase Material Variance
Labor Variance
◦Labor Rate Variance
◦Labor Efficiency Variance
Variable Overhead Variance
◦Variable overhead spending variance
◦Variable overhead efficiency variance
Fixed Overhead Variance
◦Fixed overhead spending variance
◦Fixed overhead volume variance (noncontrollable
variance)
Total Overhead Variance (2-way)
◦Budget Variance (Controllable Variance)
◦Volume Variance (noncontrollable variance)
Total Overhead Variance (3-way)
◦Budget Variance (Controllable Variance)
◦Overhead Spending Variance
◦Overhead Efficiency Variance
◦Volume Variance (noncontrollable variance)
Disposition of Standard Cost Variances
◦Immaterial or Insignificant – COGS
◦Significant Material Price Variances – Prorated to
RM Inventory, WIP Inventory, FG Inventory and
COGS
◦All other Significant Variances - Prorated to WIP
Inventory, FG Inventory and COGS
CREATING A BETTER
LEARNING EXPERIENCE
JBCG

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