Key Terms
Budget
Company-wide projected costs, revenues, and cash flows.
Standard cost
Expected amount for price paid and quantity used per unit.
Standard cost serves three functions
1. Prepare the budget for an upcoming period.
Ideal standard
Theoretical perfection; no breakdowns, no waste, no inefficiency. Not a useful motivator in practice.
Attainable standard
Level achievable with reasonable effort; what companies actually use for motivation and measurement.
Variance
Difference between standard and actual performance.
Favorable variance
Actual spending or usage is LESS than standard.
Two components of direct materials variance
1. Direct materials price variance: was the price per unit of material what we expected?
Definition
Making decisions that serve short-term variance report metrics rather than the company's long-term interests.
Formula
Total VOH Variance = VOH Rate Variance + VOH Efficiency Variance
Alternate form (same result)
DMQV = (Actual Quantity x Standard Price)
Example
Equipment breaking down increasingly = unfavorable cost variance. Short-term fix = repair current equipment.
Second example
Actual hours = 0.20. DLTV = (0.20 - 0.10) x $8.00 = $0.80 Unfavorable
Also equals
Total DL Variance = DLRV + DLTV
Example (both unfavorable)
Actual: 0.50 lb x $9.00 = $4.50 Standard: 0.25 lb x $7.00 = $1.75 Total = $4.50 - $1.75 = $2.75 Unfavorable