Chapter Summary

Standard costs are the expected (or budgeted) costs per unit. When standard costs are used in a cost accounting system, differences between actual costs and standard costs promptly are brought to management's attention.

The most widely used approach is to set budgeted amounts at levels that are reasonably achievable under normal operating conditions. The goal in this case is to make the cost standard a fair and reasonable basis for evaluating performance.

An alternative is to budget an ideal level of performance. Under this approach, departments normally fall somewhat short of budgeted performance, but the variations may identify areas in which improvement is possible.

Cost variances are computed by comparing actual costs to standard costs and explaining the reasons for any differences. Differences in the cost of materials used may be caused either by variations in the price paid to purchase materials or in the quantity of materials used. Differences in the cost of direct labor may be caused by variations in wage rates or in the number of hours worked. Variances from budgeted levels of variable overhead may be caused by differences in outlays for controllable overhead expenditures or in the actual and budgeted levels of production.

To compute fixed overhead cost variances, compare the actual fixed overhead to the budgeted fixed overhead and compare the budgeted fixed overhead to the applied fixed overhead. Fixed cost variances can result from spending more than budgeted in fixed cost categories or from a difference between the projected volume used to create the overhead application rate and the actual production used to apply overhead.

Materials variances may be caused by the quality and price of materials purchased and by the efficiency with which these materials are used. Labor variances stem from workers' productivity, pay scales of workers placed on the job, and the quality of the materials with which they work. Overhead variances result both from actual spending and from differences between actual and normal levels of production.