Standard Cost and Variance Analysis

Standard Cost
o Define Standard cost, Standard Costing,
Uses of standards
o USES OF STANDARDS:
1. Cost Control
Managers and employees should become cost conscious because variances
between standard cost and actual cost are reported, studied and their causes
determined.
2. Efficiency
Standard costing indirectly contributes to process efficiency. Fixing standard
cost requires a detailed study of different aspects of the business and its
processes. For instance, determining manufacturing expenses requires a time
and motion study, and determining standard inventory costs mandates of
study of material control processes. Very often, such studies bring to light
various inefficiencies and defects, providing managers with a ready
opportunity to correct such mistakes and promote efficiency.
3. Price Fixing
A major advantage of standard costing is that it helps to determine prices
and formulates production policies in advance. It also allows making
estimates during product planning or the pre-manufacturing phase.
4. Management
a. Standard costing promotes management by exception, where
management provides a fixed target and does not interfere as long as the
targets are adhered to or achieved.
b. Standard costing provides readymade targets that make goal setting and
institution of an incentive system easy.
c. Finally, standard costing benefits extends to the concerns of profitability
and efficiency in rank-and-file activity rather than exclusive management
functions. Standard costing places responsibility for identifying variance with
line managers and thereby, integrates product or process efficiency
interventions as a routine line activity rather than make a specialized staff
management intervention.
Types of Variances
o Direct Material Variance, Labor Variance, Overhead Variance, Sales Variance

Direct Material Variance (Formula and Example)

o Materials Quantity Variance and Materials Price Variance

Labor Variance (Formula and Example)

o Labor Rate Variance and Labor Efficiency Variance

Factory Overhead Variance (Formula and Example)

o Two way analysis (Controlable and Volume variance)
o Three way analysis ( Spending Variance, Variable Efficiency Variance and Volume
Variance)
o Four way analysis ( Fixed Spending Variance, Variable Spending, Variable Efficiency
variance and Volume variance

MATERIALS PRICE, MIX AND YIELD VARIANCES (Formula and Example)