is used to identify the size of the work force.  It shows what kind of labor force will be needed throughout the year to meet production needs and allows the company to plan to for hiring, firing and training of personnel.

Many companies use standard costing because it allows management to get more control over costs by: x

·        Allows managers to assess the efficiency of operations by providing management with a benchmark with which to judge performance.

·        Allowing a company to practice management by exception.   (Management by exception – devoting management time to investigate abnormal occurrences versus normal occurrences).

·        If set correctly, can provide a motivational tool for employees

says nothing about the efficient or inefficient usage of variable overhead.  The term, variable overhead efficiency variance, is a misnomer because this variance has nothing to do with the efficiency in the use of O/H.  Variances do not result from using more variable overhead (glue), but from using more or less driver hours.  If more hours are worked than standard allowed, then the O/H efficiency variance will be unfavorable to reflect this inefficiency.  The efficiency is not in the use of O/H but rather in the use if the base itself.  What the variance really measures is how efficiently the activity base for applying overhead is being utilized in production.

Possible causes  for DM Price Variences

include:

x

1.   Inaccurate Standards – change in market price not reflected in the standards (A hurricane in Madagascar increasing the price of coffee beans).

2.   Quality of the Materials – inferior versus superior quality; grade (purchasing manager)

3.   Quantity Discounts (purchasing/production managers)

4.   Negotiating Skill (purchasing manager) 

• Direct Material Quantity Variances
• Direct Labor Rate Variance
• Direct Labor Efficiency Variance 
• Variable O/H Efficiency Variance
• Variable O/H Spending Variance

• Variable O/H Spending Variance
• Direct Material Price Variances

Direct Labor Efficiency Variance à

Possible causes include:

x

1.   Inaccurate Standards  - The industrial engineering incorrectly assessed the time required to manufacture the product.

2.   Quality of Materials – Low grade materials may be harder to work with; high grade may be easier to work with (purchasing manager)

3.   Skill level of Workers – Skilled workers should be able to complete the tasks quicker

4.   Maintenance/Age of the Machines – Older machines may have more breakdowns than newer machines.

5.   Production Manager’s ability to Motivate Employees

Variable O/H Spending Variance à

Possible causes include: x

1.   Inaccurate Standards  

2.   Waste – Quantity (production manager)

3.   Theft

4.   Spillage

5.   Purchase in Uneconomical Lots