compares actual costs to standard costs, revealing performance gaps. It's a powerful tool for managers to identify efficiency issues, control costs, and drive continuous improvement in their operations.
has pros and cons. While it aids budgeting and , setting accurate standards can be challenging. Calculating variances for materials, labor, and overhead helps pinpoint areas needing attention and supports data-driven decision-making.
Variance Analysis and Standard Costing
Use of variance reports
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6.3 Comparing Absorption and Variable Costing | Managerial Accounting View original
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Material Cost Variance | Accounting for Managers View original
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Labor Rate Variance | Accounting for Managers View original
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Top images from around the web for Use of variance reports
6.3 Comparing Absorption and Variable Costing | Managerial Accounting View original
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Material Cost Variance | Accounting for Managers View original
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Labor Rate Variance | Accounting for Managers View original
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6.3 Comparing Absorption and Variable Costing | Managerial Accounting View original
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Material Cost Variance | Accounting for Managers View original
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compare actual costs to standard costs to identify differences between expected and actual performance
Favorable variances indicate actual costs were lower than standard costs suggesting efficiency or cost-saving measures were effective (using less raw materials than expected)
Unfavorable variances indicate actual costs exceeded standard costs suggesting inefficiencies, waste, or unexpected cost increases (higher labor rates than budgeted)
Management uses variance reports to identify areas of strong and weak performance, investigate causes of significant variances, take corrective actions to address unfavorable variances, reinforce practices leading to favorable variances, and monitor trends in variances over time
helps in continuous improvement efforts by highlighting opportunities for cost reduction and process optimization
Supports performance evaluation by providing quantitative measures of departmental or individual achievements against set standards
Pros and cons of standard costs
Advantages of standard costing:
Facilitates budgeting by providing a benchmark for expected costs
Allows for performance evaluation by comparing actual to standard costs
Supports by highlighting deviations from standards
Enables management by exception, focusing on significant variances
Provides a basis for pricing decisions and profitability analysis (setting prices based on standard costs plus desired margin)
Disadvantages of standard costing:
Setting accurate standards can be challenging and time-consuming
Standards may become outdated due to changes in processes or environment (new technology, supplier price changes)
Overemphasis on meeting standards may lead to dysfunctional behavior (cutting corners to meet cost targets)
Variances may not always provide clear insights into root causes
May not be suitable for companies with highly variable or custom products (job order costing)
Favorable variances have a positive impact on profitability (actual costs lower than standard)
Unfavorable variances have a negative impact on profitability (actual costs higher than standard)
Use to visualize the breakdown of variances into price/rate and quantity/efficiency components
Investigate significant or recurring variances to identify root causes and take appropriate actions (renegotiate supplier contracts, provide additional training to workers)
Advanced Applications of Variance Analysis
: Adjusts budgeted costs based on actual activity levels, allowing for more accurate variance calculations
Cost control: Uses variance analysis to identify areas of excessive spending and implement corrective measures
: Assigns variances to specific managers or departments responsible for controlling those costs