Budgeting 2 and Variance Analysis 1 (LECTURE 8) Flashcards
STANDARD COSTS
For repetitive environments and common operations, we can set up standards for costs, as well as for sales.
How are standard costs set?
- Many businesses use “last year’s” standards.
- Entirely suitable where there is no change from year to year.
- However, it does not encourage efficiency.
- Better to use engineering studies.
Types of standard cost.
BASIC standards remain static from year to year.
IDEAL standards assume nothing will go wrong and be 100% perfect all the time. Sometimes used but despondency can set in.
ATTAINABLE standards demand EFFICIENT, not perfect working and should be used according to theory.
TOTAL MATERIAL VARIANCE
(standard cost for actual production - actual cost)
Rules for using variances.
1) For cost variances, we usually put the standard before the actual in our computation.
2) So a positive number is a favourable variance (F) and a negative number is an adverse variance (A).
MATERIALS PRICE VARIANCE
(standard cost - actual cost) x actual quantity
MATERIALS QUANTITY VARIANCE
(standard quantity (flexed) - actual quantity) x standard price
How do you find total material variance?
Add material quantity variance and material price variance.
TOTAL LABOUR VARIANCE
standard cost - actual cost
LABOUR RATE VARIANCE
(standard rate - actual rate) x actual hours
LABOUR EFFICIENCY VARIANCE
(standard hours - actual hours) x standard rate
TOTAL VARIABLE O/H VARIANCE
standard cost - actual cost
VARIABLE O/H RATE VARIANCE
standard rate - actual rate) x actual hours
How do you calculate fixed overhead variance in a marginal environment?
Calculate a “blanket” fixed O/H variance.
standard cost - actual cost
How do you calculate fixed overhead variance in a marginal environment?
Calculate a “blanket” fixed O/H variance.
actual cost - standard cost
actually fixed O/H expenditure variance
