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Business LibreTexts

8.6: Summary and Key Terms

  • Page ID
    10430
  • Section Summaries

    8.1 Explain How and Why a Standard Cost Is Developed

    • Standards are budgeted unit amounts for price paid and amount used.
    • Variances are the difference between actual and standard amounts.
    • A favorable variance is when the actual price or quantity is less than the standard amount.
    • An unfavorable variance is when the actual price or amount is greater than the standard amount.

    8.2 Compute and Evaluate Materials Variances

    • There are two components to material variances: the direct materials price variance and the direct materials quantity variance.
    • The direct materials price variance is caused by paying too much or too little for material.
    • The direct materials quantity variance is caused by using too much or too little material.

    8.3 Compute and Evaluate Labor Variances

    • There are two labor variances: the direct labor rate variance and the direct labor time variance.
    • The direct labor rate variance determines if the rate paid is greater than or less than the standard rate.
    • The direct labor time variance determines if the actual hours used are greater than or less than the standards that should have been used.

    8.4 Compute and Evaluate Overhead Variances

    • There are two sets of overhead variances: variable and fixed.
    • The variable variances are caused by the overhead application rate and the activity level against which the rate was applied.
    • The variable overhead rate variance is the difference between the actual variable manufacturing overhead and the variable overhead that was expected given the number of hours worked.
    • The variable overhead efficiency variance is driven by the difference between the actual hours worked and the standard hours expected for the units produced.
    • There are two fixed overhead variances. One is caused by spending too much or too little on fixed overhead. The other is caused by actual production being above or below the expected production level.

    8.5 Describe How Companies Use Variance Analysis

    • The key to analyzing variances is to determine why the variance occurred.
    • If a company cannot determine why there is a variance, it will not know if the variance is indicative of a problem or not.
    • All firms—manufacturing, retail, and service—use standards and variances.

    Key Terms

    attainable standard
    level that may be reached with reasonable effort
    direct labor rate variance
    difference between the actual rate paid and the standard rate that should have been paid based on the actual hours worked
    direct labor time variance
    difference between the actual hours worked and the standard hours that should have been worked for the actual units produced
    direct labor variance
    measures how efficiently the company uses labor as well as how effective it is at pricing labor
    direct materials price variance
    difference between the actual price paid per unit for materials and what should have been paid per the standards
    direct materials quantity variance
    difference between the actual quantity of materials used and the standard materials that were expected to be used to make the actual units produced
    direct materials variance
    difference between the actual price or amount used and the standard amount
    favorable variance
    difference involving spending less, or using less, than the standard amount
    fixed factory overhead variance
    difference between the actual fixed overhead and applied fixed overhead
    flexible budget
    measurement and prediction of estimated revenues and costs at varying levels of production
    ideal standard
    level that could be achieved if everything ran perfectly
    standard
    expectation for a component used in production
    standard cost
    cost expectation for price paid and amount (quantities) used
    total direct labor variance
    actual labor costs compared to standard labor costs
    total direct materials cost variance
    difference between actual materials cost and standard materials cost
    total variable overhead cost variance
    total cost variance found by combining variable overhead rate variance and variable overhead efficiency variance
    unfavorable variance
    difference involving spending more or using more than the standard amount
    variable overhead efficiency variance
    difference between the actual hours worked and the standard hours expected for the units produced
    variable overhead rate variance
    difference between the actual variable manufacturing overhead and the variable overhead that was expected given the number of hours worked
    variance
    difference between standard and actual performance