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Understanding Standard Costs and Variance Analysis in Inventory Control

This chapter delves into the concepts of standard costs and variance analysis within the realm of inventory control. It covers the importance of establishing a budget for single units and differentiating between standard and actual costs to identify variances, which can be either favorable or unfavorable. The chapter explores direct materials, direct labor, and overheads, detailing their price and quantity standards along with the calculation of variances. Ultimately, it emphasizes the necessity for managers to address significant variances to maintain effective inventory management.

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Understanding Standard Costs and Variance Analysis in Inventory Control

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  1. Chapter 17 Inventory & Control

  2. What we will cover: • Standard costs • Variance Analysis

  3. Standard Cost • A “budget” for a single unit. • A difference between standard & actual cost is a variance. • Largevariances can be investigated & hopefully corrected.

  4. Variances can be either favorable or unfavorable.

  5. Inventory Accounts are Increased by • Standard cost of raw materials • Standard cost of labor • Standard cost of factory overhead.

  6. Direct Materials • Price Standard: Cost incurred to acquire one unit of DM. • Includes invoice cost + shipping costs. • Quantity Standard: Number of DM units needed to produce a unit of product.

  7. Direct Materials Variances: • Price: (AP-SP) x AQ purchased. • Quantity: (AQ used -SQ allowed) x SP

  8. Direct Labor • Price (or Rate) Standard: Amount that should be paid per direct labor hour. • Quantity Standard: Amount of time that should be incurred to produce a product.

  9. Direct Labor Variances: • Price: (AP - SP) x AQ of hours • Efficiency: (AQ - SQ allowed) x SP

  10. Overhead: • Price standard: the predetermined OH rates (chpt.16) • Often have separate rates for variable and fixed. • Quantity standard: amount of volume (usually DLHs) allowed for production. • Creates a problem - if volume changes from amt. used to determine predetermined OH rate, you automatically have a variance! Use Normal Activity level.

  11. Overhead Variances: • Budget Variance: Actual OH - Flex. Budget OH • Volume Variance: Flex. Budget OH - Applied OH • Applies only to fixed OH! (Not a volume variance for variable OH)

  12. At end of accounting period: • Close out all variance accounts to CGS

  13. Points: • Variances indicate problems - some will need attention, some will not. • Managers who have control over the problems should take action. • Just because a variance is favorable does not mean that all is OK!

  14. The End

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