15 - Standard costs and variance analysis

Abstract

This chapter discusses standard costs and variance analysis. Standard costs are different from the actual costs incurred; the difference or variance is debited or credited to the profit and loss section of the income statement. Two types of standards are possible—standards of perfection and standards of attainability. Attainable or expected standards are based upon what can be achieved by efficient performance. Standard costs for overhead are based on budgeted overhead and budgeted volume. Standard fixed overhead costs are only employed under absorption costing and are a function of budgeted fixed costs and budgeted volume. The difference between actual and standard cost is called a variance. A variance is favorable when the actual cost is less than the standard. Variance analysis is the process of investigation that aims to determine the particular causes of variances the computations have identified. The cost elements— material, labor, and overhead—are examined in terms of standard and actual costs, assuming that the standard has been properly set.