Accounting Ch15. Standard Costing and Variance Analysis — Taking Management Accounting to the Next Level
Ch 15. Standard Costing and Variance Analysis
Telling a manager “last month’s costs came in at 90,000, but raw material prices rose, adding $10,000 to the total” is what enables meaningful decision-making. The system that makes this possible is Standard Costing.
1. What Is Standard Cost?
Standard cost is a scientifically and statistically determined target cost that should be achieved. It serves as a benchmark against which actual costs are compared after the fact, enabling an evaluation of operational performance.
2. Cost Variance Analysis Simulator
Analyze the two most critical variances: Price Variance and Efficiency Variance.
Favorable (F) vs Unfavorable (U) Variances
- Favorable (F): Actual cost < Standard cost (cost savings)
- Unfavorable (U): Actual cost > Standard cost (cost overrun)
3. Eight-Direction Analysis of Price and Efficiency Variances
Price variance is typically the responsibility of the purchasing department, while efficiency variance is usually attributed to the production department.
| Item | Formula | Responsible Department |
|---|---|---|
| Price Variance | AQ × (SP − AP) | Purchasing Department |
| Efficiency Variance | SP × (SQ − AQ) | Production Department |
Standard costing goes beyond accounting figures to form the foundation of responsibility accounting. Use the simulator to build a complete mental model of the chain: AQ (Actual Quantity), AP (Actual Price), SQ (Standard Quantity Allowed), and SP (Standard Price).
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