Standard Costing Part4

ACCA F5 - Performance Management 


Simply expressing variances in term of numbers do worth nothing and represents burden imposed to management. Variances do not itself disclose underlying causes. Managers should seek causes of variances and the relationship between variances.

Positive variance does not always stands for favourable performance. For example, standard set price per kilo of raw material was $10 but actually $9 was paid for the material give a positive variance of $1. If real market price for material for the period was, $8 means that whether wrong standard was set or the price of the product fall to unexpected level. The underlying cause for payment of $9 can be the contract with vendor or it can be managerial unwillingness to study the market price or similar causes.

Variances are interrelated to each other. A favourable material price variance can result unfavourable usage variance, unfavourable labor variance and unfavourable sales variance. Cheap and low quality material used for production can increase labor time, consume extra material and result in lower sales volume. Most one variance will exert thrust for changes in other variances.

Operating statement

Absorption Costing			Marginal costing
$F/(A)	profit	Budgeted Profit/contribution		contribution	$F/(A)
	profit per unit	Sales volume variance using		contribution per unit
	flexed budget profit	Standard profit on actual sales		flexed budget contribution
		Sales price variance
Cost Variances:
		Material price
		Material usage
		Labor rate
		Labor efficiency
		Variable overhead rate
		Variable overhead efficiency
Field not required		Actual Contribution
Field not required		Budgeted fixed production overhead
		Fixed overhead volume (FOV) - Production		Field not required
		Fixed overhead expenditure - Production
		Fixed overhead expenditure - Non -production
		Total
		Actual Profit