ACCOUNTING; chapter 10

Why are separate price and quantity variances computed?

Separating price and quantity variances gives insight into what causes variances to be favorable or unfavorable, and is a tool useful for seeing if costs were too high or if too much material was used.

Limitations of Variance Analysis

Variances are often too aggregated and too late to be useful. Too much focus on controlling costs Less focus on cost reduction activities Less focus on quality, customer service, and other drivers for future financial performance Could induce behaviors that maximize unit performance, but not overall firm performance

Standard Cost Card

A detailed listing of the standard amounts of inputs and their costs that are required to produce one unit of a specific product

What is a quantity standard? What is a price standard?

A quantity standard is the amount of materials that should be used in the production of a single unit. Price standard is the price that should be paid for materials at a given level of activity.

Advantages of Variance Analysis

Focus on efficiency key element in a management by exception approach. If costs conform to the standards, managers can focus on other issues Provide a "signal" when something is wrong Provide a means for performance evaluation

Labor Rate Variance

The difference between the actual hourly labor rate and the standard rate, multiplied by the number of hours worked in a period.

Labor Efficiency Variance

The difference between the actual hours used to complete a task and the standard hours allowed for the actual output, multiplied by the standard hourly labor rate.

Materials Quantity Variance

The difference between the actual quantity used in production and the standard quantity allowed for actual production, multiplied by the standard price per unit of materials.

Materials Price Variance

The difference between the actual unit price paid per item and the standard price, multiplied by the quantity purchased.

Price Variance

a variance that is computed by taking the difference between the actual price and the standard price and multiplying the result by the actual quantity of the input

Standards and the two types

are benchmarks or "norms" formeasuring performance. Two types of standards are commonly used in cost control: -Price Standards specify how much should be paid for each unit of the input. -Quantity Standards specify how much of an input should be used to make a product or provide a service.

variable overhead efficiency variance

the difference between the actual level of activity (direct labor-hours, machine-hours, or some other base) and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate

standard cost per unit

the standard quantity allowed of an input per unity of a specific product, multiplied by the standard price of the input

standard hours allowed

the time that should have been taken to complete the period's output. It is computed by multiplying the actual number of units produced by the standard hours per unit