The most common variances computed automatically are production-related variances
This is usually called a STANDARD COSTING SYSTEM
All inventory costs are recorded at budgeted amounts (the standard amounts)
Variance accounts pick up the differences between budget and actual
3 Production Variances
The computations are similar to what we illustrated for sales. You change one element at a time and, from the difference, determine the impact on costs (instead of sales) 4 Standard Budget is Different from Flexible Budget
In flexible budget is more OUTPUT oriented,
Standard budget is more INPUT oriented regarding production costs.
Interpretations are How efficiently firms use the materials, labors, and FOH.
5 Production variances 6 Direct Labor Example
Budgeted labor costs to make one widget
2,200 widget production
½ hour (manufacturing labor) hours
20 per hour for manufacturing worker
Therefore, the standard DL cost per widget 10
Assume actual production 2,000 widgets
1,200 direct labor hours
Average rate of pay 19 per hour
7 DL variance example 8 DL variance example - solution Rate Variance 1,200 F 9 Example
ABC company manufactures a product that has the direct materials, standard cost presented below. Find the price and efficiency variance for direct materials and direct labors.