4/9/2015
ACCT505 Week 5 Lecture (JAN15)
Print
Standard Costs, Variances, and Flexible Budgets
Standard Costs and Variances | Factory Overhead Variances | Price and Efficiency Variances |
Flexible Budgets and Overhead Analysis | The Static Budget Versus the Flexible Budget | Fixed
Factory Overhead Variance | Exam Preparation Exercises
Standard Costs and Variances
Back to Top
Standard costs are budgeted unit costs established to motivate optimal productivity and efficiency. It
is through the use of a standardcost system that management is alerted when actual costs of
production differ significantly from target or standard costs. These standard costs are monetary
measures to which actual costs are compared. Keep in mind, however, that a standard cost is not just
an average of past costs but an objectively determined estimate of what a cost should be. This
standard could be based on accounting, engineering, or statistical quality control studies (accountants
do not work in isolation). Because of the impact of fixed costs in most businesses, a standard costing
system is usually not effective unless the company also has a flexible budgeting system. Flexible
budgeting uses standard costs to prepare budgets for multiple activity levels.
A variance is created when actual costs and standard costs differ. A favorable variance arises when
actual costs are less than standard costs, and an unfavorable variance occurs when the actual costs
are greater than standard. This is easy to remember if you keep in mind that organizations generally
strive toward reduced costs. For example, let's say the organization determines that standard direct
material costs are $10 per unit. During February, however, the organization experienced direct
material costs of $10.25 per unit; as a result, there is an unfavorable direct material variance of $0.25
per unit. Management may have to take corrective action....