# 8. Cost Variances.student version - AGENDA Variance...

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AF 3112 MANAGEMENT ACCOUNTING 2 AF3112 - 2013 1 Standard Costing: Cost Variances AGENDA Variance Analysis Cycle and framework Direct Cost Variances Interpretation and Journal Entries for Direct Cost Variances AF3112 - 2013 2 Direct Cost Variances Overhead Variances Interpretation and Journal Entries for Overhead Variances Variance Analysis Cycle Identify questions Receive explanations Take corrective actions AF3112 - 2013 3 Prepare standard cost performance report Conduct next period’s operations Analyze variances Begin Standard Cost Variances Standard Cost Variances AF3112 - 2013 4 Quantity Variance Price Variance The difference between the actual price and the standard price The difference between the actual quantity and the ________________
Variance Analysis Framework Direct Costs Actual Quantity Actual Quantity Standard Quantity ǘ ǘ ǘ Actual Price Standard Price Standard Price AF3112 - 2013 5 Price or Rate Variance Usage or Efficiency Variance The total variance is the flexible budget variance. Actual Quantity Actual Quantity Standard Quantity ǘ ǘ ǘ Actual Price Standard Price Standard Price Variance Analysis Framework Direct Costs AF3112 - 2013 6 Standard price is the amount that should have been paid for the resources acquired. Price or Rate Variance Usage or Efficiency Variance Actual Quantity Actual Quantity Standard Quantity ǘ ǘ ǘ Actual Price Standard Price Standard Price Variance Analysis Framework Direct Costs AF3112 - 2013 7 Price or Rate Variance Usage or Efficiency Variance Standard quantity is the quantity allowed for the actual good output. A ctual Q uantity A ctual Q uantity S tandard Q uantity ǘ ǘ ǘ A ctual P rice S tandard P rice S tandard P rice Variance Analysis Framework Direct Costs AF3112 - 2013 8 AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price or Rate Variance Usage or Efficiency Variance
Direct Materials Standards Price Standards AF3112 - 2013 9 Use product design specifications. Use competitive bids for the quality and quantity desired . The standard material cost for one unit of product is: standard quantity ________________for of material one unit of material required for one unit of product ǘ Direct Materials Standards AF3112 - 2013 10 unit of product Hanson Inc. has the following direct material standard to manufacture one Jerf: Material Variances Example Jerf AF3112 - 2013 11 1.5 pounds per Jerf at \$4.00 per pound Last month 1,700 pounds of material were purchased and used to make 1,000 Jerfs. The material cost a total of \$6,630. Actual Quantity Actual Quantity Standard Quantity ǘ ǘ ǘ Actual Price Standard Price Standard Price 1,700 lbs. 1,700 lbs. 1,500 lbs. Jerf Material Variances Example AF3112 - 2013 12 ǘ ǘ ǘ \$3.90 per lb. \$4.00 per lb. \$4.00 per lb. \$6,630 \$ 6,800 \$6,000 Price variance \$170 favorable Usage variance \$800 unfavorable
Hanson Inc. has the following material standard to manufacture one Zippy: 1.5 pounds per Zippy at \$4.00 per pound Material Variances Example 2 Zippy AF3112 - 2013 13 1.5 pounds per Zippy at \$4.00 per pound Last week 2,800 pounds of material were purchased at a total cost of \$10,920, and 1,700 pounds were used to make 1,000 Zippies.