Standard costing variances

Primble

Hi,

I am useless at this. what are all the formulas i need to remember for variances?

is standard the same as budgeted amounts?

embica

I'm struggling with exactly the same thing - I've spent all day teaching myself from the text books but when I look at past papers they calculate things differently and get different answers

Standard is the different between actual and budgeted

Suju

Variances

Hi both. As far as I understand it, there are actually 3 things:

1) Budgeted costs.
This is the original plan as it were. From this you can calculate the 'standard cost' of one item, e.g. budgeted £2,000 to make 100 units then the standard cost of 1 unit is £2,000 / 100 units = £20 per unit.

2) Actual costs
Say £2,500. Note that you may actually have made more than you budgeted, e.g. made 120 units.

You cannot simply say you spent £500 more than budget because you are comparing a budget for 100 units with actual costs for 120 units. So you need to calculate a 'flexed' budget (or revised budget if you like) for the 120 units so you can compare like with like. So:

3) Flexed / revised budget
As simple as saying £20 per unit x actual 120 units made = new budget of £2,400 (which is £400 more than the original budget).

So now you have:
* 120 units: budget £2,400
* 120 units: actual costs £2,500

The total variance is £100 and you need to look at the individual variances causing this. I won't go through all the formulae here, but I've found the formulae used can be varied - a lot of it is shortcuts for people who know exactly what they are doing. If you aren't confident with this - or liable to forget under exam pressure like me - then I suggest you go the more long-winded but reliable method which can be worked out through first principles:

E.g. Calculate the material price variance when you are told:
Budget is £120,000 for 10,000 kg
Actual is £147,000 for 10,500kg.

Standard price per kg (from the budget) = £120,000 / 10,000kg = £12 per kg
So the actual 10,500kg should have cost £12/kg x 10,500kg = £126,000 (this is the flexed budget for actual material used)
But it actually cost £147,000
So the material price variance is £147,000 actual - £126,000 expected = £21,000 ADVERSE (it cost more than expected).

You can double-check if you like: Actual £147,000 / 10,500kg = £14 per kg.

Another way is to say it should have cost £12 per kg but actually cost £14 per kg. Paid an extra £2 per kg, x actual 10,500kg = £21,000 extra paid.

The other variances are similar - calculate what it should have cost for the actual units, then what it actually cost for the actual units, then the variance is the difference.

Hope this helps - and good luck!

wolfe

thanx suju. really great post. atlast the mystery of standard and budegeted has been solved!!!. thank u

Londina

Primble wrote: »

is standard the same as budgeted amounts?

My confusion is with the terminology certain amounts are called in the text books or past papers, examples:

*the original Budget sometimes is called Standard
*the Flexed budget is also called Standard

Therefore when the question ask to "calculate the standard cost of something" sometimes I don't know if it refers to the budget amount or the flexed one!:confused1:

Primble

this is why i get confused

SandyHood

I'll take your comment and expand a little as abbreviations can lead to confusion:

*the original Budget sometimes is called Standard
*the Flexed budget is also called Standard

They are both standard costs of production

1. The original budget is the standard cost of one unit multiplied by the budgeted number of units
2. The flexed budget is the standard cost of one unit multiplied by the actual number of units