Page 129 - BA2 Integrated Workbook STUDENT 2018

Standard costing and variance analysis

Variances

In budgetary control, we saw that variances were calculated by comparing the actual
costs to the flexed budget cost. In standard costing, variances are calculated in the
same way, although more detailed variance analysis is possible.

Total cost variances can be broken down to explain how much of it is caused by the
usage of resources being different from the standard, and how much of it is caused
by the price of resources being different from the standard.

If resource price or usage is above standard, or if sales volume or selling price is
below standard, an adverse variance will result. If resource price or usage is below
standard, or if sales volume or selling price is above standard, a favourable variance
will result.

2.1 Variance example

We will use the following example in all of the variance calculations.

XYZ manufactures a single product. The standard cost card for one unit of the
product is given:

$
Direct material: 10 kg × $7 per kg 70
Direct labour: 40 hours × $10 per hour 400
Variable overhead: 40 hours × $3 per hour 120
——–
590
——–

For January, the company had budgeted to produce and sell 2,000 units, but 2,100
units were actually produced and sold and the actual costs incurred were as follows:
Direct material: 22,500 kg purchased and used at a cost of $146,250
Direct labour: 83,000 hours worked at a cost of $845,000
Variable overhead: $248,200

123