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Unformatted text preview: rable variances result when actual costs are less than standard costs, and vice
The following illustration is intended to demonstrate the very basic relationship between actual cost
and standard cost. AQ means the “actual quantity” of input used to produce the output. AP means
the “actual price” of the input used to produce the output. SQ and SP refer to the “standard” quantity
and price that was anticipated. As you will soon see, variance analysis can be conducted for each
factor of productive input: material, labor, and overhead. For the moment, just focus on the major
concept -- variances are simply the differences between actual cost incurred and the standard cost
that was appropriate for the achieved production: Variance analysis is the logical examination of the deviations in an attempt to identify areas for
improvement. Management is responsible for careful evaluation of variances. This task is an
important part of effective control of an organization. While comparing total actual costs to total
standard costs is interesting, it provides little useful information for pinpointing specific problem
areas. Instead, management must perform a more penetrating analysis into the detailed variances
relating to each factor of production. Download free ebooks at bookboon.com
23 Variance Analysis Tools for Enterprise Performance Evaluation 4.1 Variances Relating to Direct Materials
The total variance for direct materials is found by
comparing actual direct material cost to standard
direct material cost. The top portion of the
illustration at right demonstrates this point.
However, the overall materials variance could result
from any combination of having procured goods at
prices equal to, above, or below standard cost, and
using more or less direct materials than anticipated.
Proper variance analysis requires that the Total
Direct Materials Variance be separated into the:
Materials Price Variance: A variance that reveals the difference between the standard price
for materials purchased and the amount actually paid for those materials [(standard price actual price) X actual quantity]. Please click the advert Materials Quantity Variance: A variance that compares the standard quantity of materials
that should have been used to the actual quantity of materials used. The quantity variation is
measured at the standard price per unit [(standard quantity - actual quantity) X standard
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24 Variance Analysis Tools for Enterprise Performance Evaluation If you carefully study the illustration, you will see there are several ways to perform the intrinsic
variance calculations. You can very simply compute the values for the red, blue, and green balls;
noting the differences. Or,...
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