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

task analysis (how long the task should take or the quantity that should be used) and the analysis of historical data (how long does it usually take or how much material is really used).   

are inefficiencies caused by occasional machine breakdowns, normal worker fatigue (bathroom breaks), allowances for normal amounts of scrap and waste. (i.e., normal 2% defect rate associated with raw material inputs).

The price for a particular grade or quality, ordered in particular lot sizes, delivered by a particular means of transportation (truck, air) (For example, Grade A in 500 pound quantities, delivered by truck).  *Expected price per DM unit*

Should reflect the amount of material going into each unit of finished product, as well as an allowance for unavoidable waste, spoilage, and other normal inefficiencies. *expected quantity of DM units used for actual production level*

The variable portion of the pre-determined overhead rate divided by the estimated activity base

Positive numbers mean unfavorable variances while negative numbers mean favorable variances.

T/F

is the difference between the total actual cost of Variable O/H and the expected cost (SVR x AH).  This could be from paying more, or from using more – due to Price and Quantity variances.    

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 à

Possible causes include:

1.   Inaccurate Standards

2.   Quality of the Materials – Low quality materials may result in higher breakage, spoilage, scrap, etc.

3.   Poor Maintenance of Machinery/Improperly Adjusted Machines

4.   Improper Employee Training/Poor Supervision/Carelessness

5.   Skill Level of Workers - unskilled workers versus skilled workers

6.   Theft of Materials

Direct Labor Rate Variance à

Possible causes include:

1.   Inaccurate Standards (change in wage rates) i.e., changes in the minimum wage, new union contracts, etc.

2.   Skill and seniority level of Employees – Different mixes of employees.  If more expensive workers are assigned to the task, costs will increase

3.   Overtime/Scheduling

• 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

1.   Because of a stock shortage at its regular supplier, CM had to rely on a new vendor for two purchases of raw material parts.  The vendor required CM to pay air-freight charges; however, upon arrival, the company found the goods to be above-average in quality.

DM Use Variance: Favorable

DM Price Variance: Unfavorable

1.   The local municipality raised its property tax rates by 2%.

1.   A flu outbreak on the assembly line forced management to use more experienced, senior personnel to complete production orders on a timely basis.  These workers more than made up for lost time.

DL Usage Rate Variance:-Favorable-more than made up for lost time

DL Price Variance:Unfavorable-Must pay more for experience

1.   A shoddy maintenance program resulted in an abnormally high number of breakdowns on machine no. 76 and slowed production.

DL Usage Variance:Unfavorable- more hours for same output

DL Price Variance:Unfavorable-overtime