Variance analysis

What are cost variances?

Definition A variance exists when standard costs differ from actual costs. The difference between standard cost and actual cost is called a Cost Variance. Explanation Cost variances for Material, Labour and Overhead result from a variety of different causes. Hence, in evaluating the efficiency of a manufacturing organization, these variances should be measured and analyzed. …

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Overhead variances

Controlling overhead costs is more difficult and complex than controlling direct materials and direct labor costs because responsibility for overhead costs is difficult to pin down. The total overhead cost variance can be sub-divided into a budget or spending variance and an efficiency variance. The budget or spending variance is the difference between the budget and the …

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Direct Labor Variances

Like direct material standards, direct labor standards also consist of two components, quantity and price. The direct labor quantity standard is usually referred to as labor efficiency variance while the price standard is referred to as labor rate variance. Formula Labour Cost Variance = (Standard hours for Actual output x Standard Rate) – (Actual Hours …

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Material Variances

Explanation Material variances include two factors: (1) the quantity of materials that should have been used to produce one unit of output and (2) the prices that should have been paid in acquiring this quantity of materials. Hence the total material cost variance may result from difference between standard and actual quantities of materials used …

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Variance analysis

Standard costs (SC) are an indication of what costs should be for a unit of production. The difference between actual cost (AC) and standard cost (SC) is called a variance. Variances can be analyzed to determine why they exist and this analysis can provide a basis for taking corrective action. If the actual cost is …

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Standard Costing

Definition of Standard Costing “Standard costing is a system of accounting which makes use of predetermined standard costs for direct material direct labour and factory overhead.” Standard Costing is the second technique of cost control (the first being the Budgetary Control) and is one of the most recently developed refinements of cost accounting. The standard …

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