Standard Costing Variances

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Registered Posts: 2 New contributor 🐸
Hi

Does anyone have any tips for remembering ALL the standard cost variances ?? There are so many formulas for PEV it is just so unfair my brain is frazzled & just when I think I have it I try to do a past paper & get confused again AAARRRGGGHHH !!!

Jo

• Registered Posts: 26 Regular contributor ⭐
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I know exactly what you mean, im doing pev, pcr and dfs all in the june sitting. My brain is completely frazzled from dfs and pcr and im too scared to even look at the pev paper yet!!
• Registered Posts: 172 Dedicated contributor 🦉
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Everyone learns the formulas slightly different but I find the best way to learn them is to write them out over and over again until they finally sink in. So far I've learnt the proforma for MC and AC, the additive and mutiplicitive formulas for seasonal variances and the material and labour variance formulas. I find the best way is to write out a few at a time and gradually add more to them and then you can (hopefully!) eventually write the whole lot out in one go. May not work for you though. Good luck :-)
• Registered, Moderator Posts: 2,034 mod
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I have taught variances for very many years, and before that worked in businesses where periodic reporting included identifying key variances.
I do not teach my own classes using formulae.

Formulae are one process you can use to work out the value of each variance, but if you understand what the variances can tell you then the process of how to find them tends to follow more easily.

Learning lots of formulae can be helpful, but if you miss a little you can end up with an error in the answer without being able to recognise it is.

Here are some responses I have made to previous postings:
1. I prefer to try to understand the results rather than rote learning a process.

If last month's material cost was £35,000 I want to know whether this was about right for what we produced, and about right for what we used.

So I look at the overall variance.
We made 7,000 units, each should use 3kgs of raw material and our standard cost per kg is £1.50.
We issued 20,000 kgs to production at a cost of £35,000

So our standard would expect us to use 21,000 kgs to make 7,000 units. These should cost £31,500.

We used 20,000 kgs to make the 7,000 units.
We would have expected to use 21,000 kgs
We actually used 20,000 kgs
So our usage was 1,000 kgs less than the standard
at £1.50 per kg this gives a material usage variance of £1,500 favourable

We would expect that the 20,000 kgs we used would cost £1.50 per kg = £30,000
It actually cost £35,000
So our material price variance is £5,000 adverse
2. Think about what you are trying to show rather than trying to learn formulas.

Labour efficiency
How many hours does the standard time say that the units produced should have taken?
How many hours did it take?
Was the standard time more? (So our workforce must have been more efficient than the standard would expect) A favourable variance
Was it less? (An adverse variance)
And how much was the difference in hours worth at the standard rate per labour hour.

Not a formula in sight, but whenever you think of a manufacturing setting visualise what the standards say should happen, then compare it with the actual results and make sensible suggestions about what you think caused it.
3. If production is lower than budget

There will always be an adverse f o volume variance

There are more than one way to work out the value, one way is overhead absorbed per unit x difference between budgeted output and actual output.

If hours worked are lower than budgeted total hours

There will always be an adverse f o capacity variance

one way to work out the value is overhead absorbed per hour x difference between budgeted hours and actual hours.

If the standard hours (units produced x standard hours per unit) are lower than the actual hours

There will always be a favourable f o efficiency variance

Sandy
sandy@sandyhood.com
www.sandyhood.com
• Registered Posts: 26 Regular contributor ⭐
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R.A.O. Sandy Hood,

Forgive me for being really thick but please can you tell me what you are refering to in your threat when you say:

• Registered Posts: 26 Regular contributor ⭐
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what does the "f o" mean
• Registered Posts: 3 New contributor 🐸
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standard cost variance

you need to bear in mind what you want to calculate, what I do to remember is to remember what hours realate to and what material relates. for eg. for material relates to quantity, while labour relates to rate. hence to get the variance is the difference between hours x quantity. same procedure for labour , hope this may help
• Registered, Moderator Posts: 2,034 mod
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