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# Standard Costing and Variance Analysis

## Introduction

One of the most important concepts in managing costs is the establishment of standards and analyzing the variances. With the use of predetermined costs, known as standard costs, we can compare and analyze actual results versus expectations based on the set standards.

In a Nutshell

In this series of lessons, we will first define and learn about the concepts of standard costing.

After that, we will take a look at the different variances and walk you through how to compute and analyze each variance.

Lesson 1

## What is Standard Costing?

Standard costing is a cost accumulation method that makes use of predetermined amounts known as standard costs. The use of standard costs has several advantages.
Lesson 2

## Standard Costs

Standards refer to the acceptable measures of performance. Standard costs are based on past experiences, market rates, industry standards, or other relevant information.
Lesson 3

## Direct Materials Variance

Standard costing allows comparison between actual costs incurred and budgeted costs based on standards. The direct materials (DM) variance is computed by comparing the total actual cost and total standard cost of the raw materials.
Lesson 4

## Direct Labor Variance

The direct labor (DL) variance is the difference between the total actual direct labor cost and the total standard cost. The direct labor variance may be split into: direct labor rate variance and direct labor efficiency variance.
Lesson 5

Standard costing allows management to determine and analyze areas that deviate from established standards. This article shows a rundown of the different variances used in analyzing variable and fixed factory overhead.
Lesson 6

## Two-Way Analysis of Factory Overhead Variance

The 2-way analysis of factory overhead shows the difference between the total actual and total standard FOH costs split into two components: budget variance and volume variance.
Lesson 7

## Three-Way Analysis of Factory Overhead Variance

The 3-way analysis shows the difference between the total actual factory overhead and total standard factory overhead costs split into three components: spending variance, efficiency variance, and volume variance.
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