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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.

Image link to What is Standard Costing
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.
Image link to Standard Costs
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.
Image link to Direct Materials Variance
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.
Image link to Direct Labor Variance
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.
Image link to Factory Overhead Variance
Lesson 5

Factory Overhead Variance

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.
Image link to Two Way Analysis
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.
Image link to Three Way Analysis
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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