tools-for-enterprise-performance-evaluation

Favorable variances result when actual costs are less

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Unformatted text preview: rable variances result when actual costs are less than standard costs, and vice versa. 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 price]. We will turn your CV into an opportunity of a lifetime Do you like cars? Would you like to be a part of a successful brand? We will appreciate and reward both your enthusiasm and talent. Send us your CV. You will be surprised where it can take you. Send us your CV on www.employerforlife.com Download free ebooks at bookboon.com 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 If variance calculations. You can very simply compute the values for the red, blue, and green balls; noting the differences. Or,...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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