MANAGERIAL ACCOUNTING
TOOLS FOR FACILITATING AND GUIDING BUSINESS DECISIONS
with Gary Hecht
MODULE 3
Standard Costing and
Variance Analysis
LESSON 3 - 1
Fundamentals of Standard Costing and
Variance Analysis
VIDEO 3 - 1.1
Fundamentals and Concepts
LESSON 3-1 OBJECTIVES
You will understand:
The definition of standard costs
The purpose of a standard costing system
The fundamentals of variance analysis
WHAT IS A STANDARD?
A “standard” is a carefully pre-determined price,
cost, or quantity amount:
Generally expressed on a per-unit basis
Generally pre-determined through the
budgeting process
CONTROL SYSTEMS
Diagnostic control systems
Setting targets
Monitoring performance against targets
Budgeting
Variance analysis
FUNDAMENTALS OF
VARIANCE ANALYSIS
Provides a comparison of “actual” and “expected” outcomes for the
purposes of measuring, evaluating, and improving performance
Allows for a detailed investigation of various sources of differences
from expectations
Facilitates management by exception
STATIC VS. FLEXIBLE
BUDGETS
Static Budget - How much
should we have spent, given
our planned level of production
(or other activity)?
Flexible Budget - How much should
we have spent given our actual
level of production (or other
activity)?
CATEGORIZING
VARIANCES
“Unfavorable variance” = actual net
income is lower than budgeted
“Favorable variance” = actual net
income is higher than budgeted
Note: Do not necessarily interpret
“unfavorable” as “bad” or “favorable”
as “good.”
VIDEO 3 - 1.2
Cost Variance Classification
and General Framework
COST VARIANCE CLASSIFICATION
Spending
Variable costs Static
Direct materials Budget
Efficiency
Direct labor Variance
Variable overhead
Activity/Volume
Static
Fixed costs Budget
Fixed overhead Variance
GENERIC FRAMEWORK FOR VARIABLE COSTS
VIDEO 3 - 1.3
Causes of Variances
DIRECT MATERIAL
SPENDING VARIANCES
What could cause a direct material
spending variance?
DIRECT MATERIAL
EFFICIENCY VARIANCES
What could cause a direct material
efficiency variance?
DIRECT LABOR
SPENDING VARIANCES
What could cause a direct labor
spending variance?
DIRECT LABOR
EFFICIENCY VARIANCES
What could cause a direct labor
efficiency variance?
WHAT WE’VE LEARNED
IN LESSON 3-1
The definition of standard costs and
their role within an organization’s
costing system
The fundamental concepts
underlying variance analysis
MANAGERIAL ACCOUNTING
TOOLS FOR FACILITATING AND GUIDING BUSINESS DECISIONS
with Gary Hecht
MODULE 3
Standard Costing and
Variance Analysis
LESSON 3 - 2
Calculating and Interpreting Cost
Variances
VIDEO 3 - 2.1
An Example Scenario
and Direct Material Variances
LESSON 3-2 OBJECTIVES
You will understand:
Materials, labor, and overhead
variance calculations
Fixed cost variance calculations
Interpreting cost variances
EXAMPLE
Standard cost information
Material (6 pounds at $.50 per pound)
Labor (1 DL hour at $8 per DL hour)
Variable overhead (1 machine hour at $2 per machine hour)
Production
Estimated = 4,750 units of production
Actual = 4,250 units of production
Actual costs incurred
Direct material (26,100 pounds) = $12,750
Direct labor (4,150 DL hours) = $34,445
Variable overhead (4,700 machine hours) = $10,100
DIRECT MATERIAL CALCULATIONS
VIDEO 3 - 2.2
Direct Labor Variances
DIRECT LABOR CALCULATIONS
VIDEO 3 - 2.3
Variable Overhead Variances
VARIABLE OVERHEAD CALCULATIONS
VIDEO 3 - 2.4
Fixed Cost Variances
WHAT ABOUT FIXED COSTS?
EXAMPLE
Budgeted information
Fixed cost = $16,625
Cost driver = machine hours
1 machine hour per unit produced
Actual information
Fixed cost = $16,900
Units produced = 4,250
Machine hours used = 4,700
EXAMPLE
VIDEO 3 - 2.5
Production Volume Variances
A DIFFERENT VARIANCE
Production volume variance
Difference between budgeted
overhead and applied overhead
Calculation depends on how
overhead is applied
Standard costing system
Normal costing system
EXAMPLE
VIDEO 3 - 2.6
What We’ve Learned
WHAT WE’VE LEARNED
IN LESSON 3-2
The general framework and
calculations related to variable costs
Fixed cost variance calculations
How to interpret cost variances
MANAGERIAL ACCOUNTING
TOOLS FOR FACILITATING AND GUIDING BUSINESS DECISIONS
with Gary Hecht
MODULE 3
Standard Costing and
Variance Analysis
LESSON 3 - 3
Revenue Variances
VIDEO 3 - 3.1
Fundamentals and General Framework
LESSON 3-3 OBJECTIVES
You will understand:
Fundamentals of revenue variances
How to calculate revenue variances
How to interpret revenue variances
GENERIC FRAMEWORK FOR REVENUES
VIDEO 3 - 3.2
An Example Scenario
EXAMPLE — COOKIES
Budgeted Selling Price Sales Volume
Chocolate chip $4.50 45,000
Oatmeal raisin $5.00 25,000
Macadamia nut $6.50 15,000
Actual Selling Price Sales Volume
Chocolate chip $4.50 57,600
Oatmeal raisin $5.20 18,000
Macadamia nut $7.00 21,600
EXAMPLE - COOKIES
VIDEO 3 - 3.3
What We’ve Learned
WHAT WE’VE LEARNED
IN LESSON 3-3
The fundamentals of revenue
variances
How to calculate and interpret
revenue variances
VIDEO 3 - 3.4
Module 3 Review
WHAT WE’VE LEARNED
IN MODULE 3
Fundamentals and purpose of
variance analysis
Calculation and interpretation of cost
variances
Variable costs
Fixed costs
Calculation and interpretation of
revenue variance