A General Model for Variance Analysis
-important reason for separating standards into 2 categories- price & quantity is that diff managers are usually responsible for buying/for using inputs/these 2 activities occur at diff points in time
Variances: difference between standard prices/quantities and actual prices/quantities
-act of computing/interpreting variances is called variance analysis
-price variance/quantity variance can be compute for all 3 variable cost elements
-although price variance may be called diff names, it is computed in exactly the same way
-the inputs represent the actual quantity of direct materials, direct labour/overhead used à output represents the good production of the period expressed in standard quantity allowed for actual output
Standard Quantity Allowed: amount of materials that should have been used to complete the period’s output, as computed by multiplying the actual number of units produced by the standard quantity per unit
Standard Hours Allowed: time that should have been taken to complete the period’s output, as computed by multiplying the actual number of units produced by the standard hours per unit
-they are both SHOULD have been used, may be diff from amount ACTUALLY used
-when standard cost system is being used, flexible budget is based on the standard quantity allowed for the actual output achieved multiplied by the standard price per unit
Using Standard Costs- Direct Materials Variances
-after computing the standard costs for DM, DL and Variable overhead, next step is to compute variances
-variance is labelled favourable if the actual purchase price (cost) is less than standard purchase price
-standard price is used when computing quantity variance
-2 reasons why companies compute the materials price variance when materials are purchased rather than when they are used in production:
-1st, delaying