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CHAPTER TEN
Variance Analysis—A Tool for Cost Control and Performance Evaluation
This chapter expands the discussion of flexible budgeting and introduces
the concept of standard costs and variance analysis as tools to help
managers “manage by exception” and evaluate performance in their
Key Concepts
• The type of standard (practical or ideal) chosen to evaluate
performance can have significant effects on employee morale and
behavior.
• Personnel and production managers are often responsible for direct
labor variances.
• The variable overhead efficiency variance does not measure the
Instructor’s Manual
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Learning Objectives
LO1— Describe methods of determining standard costs and discuss the
use of ideal versus practical standards.
LO5— Compute and interpret price and usage variances for direct
materials.
Chapter 10 – Variance Analysis—A Tool for Cost Control and Performance Evaluation
Lecture Outline
A. Standard Costing (LO1)
o A budget for a single unit of a product or service is known as
1. Ideal versus Practical Standards
o An ideal standard is attained only in near-perfect conditions.
2. Use of Standards by Nonmanufacturing Organizations
B. Flexible Budgeting with Standard Costs (LO2)
o Flexible budgets based on standard costs are the
Key Concept
Instructor’s Manual
1. Sales Price Variance
2. Selling and Administrative Expense Variance
o The selling and administrative expenses variance are
1. Variance Analysis Model
1. Direct Material Price Variance
2. Direct Material Usage Variance
o Actual quantity (AQ) × [Actual price (AP) – Standard price
Key Formula
Key Formula
Price Variance = Standard price (SP) × [Actual quantity (AQ) – Standard
use of overhead but rather the efficient use of the cost driver, or overhead
allocation base, used in the flexible budget.
Chapter 10 – Variance Analysis—A Tool for Cost Control and Performance Evaluation
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3. Direct Material Variances When Amount Purchased Differs from Amount
Used
o Price Variance = SP × [AQ (purchased) – SQ]
F. Direct Labor Variances (LO6)
o Rate variance = Standard rate (SR) × [Actual hours (AH) –
G. Variable Overhead Variances (LO7)
Rate × (Actual Hours – Standard Hours)
H. Fixed Overhead Variances (LO8)
Key Concept
Key Concept
Personnel and production managers are often responsible for direct labor
variances.
Key Concept
The variable overhead efficiency variance does not measure the efficient
Instructor’s Manual
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I. Interpreting and using Variance analysis (LO9)
o Standard costs and variance analysis are most effective in
stable companies with mature production environments
1. Management by Exception
2. Interpreting Favorable and Unfavorable Variances
3. Behavioral Considerations
Key Concept
Key Concept
Key Formula
.
Key Formula
Fixed overhead volume variance = Budgeted fixed overhead – Applied fixed
overhead
responsible for direct labor variances.
Chapter 10 – Variance Analysis—A Tool for Cost Control and Performance Evaluation
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o The use of standard costs and variance analysis can cause
End-of-Chapter Material
This chapter has a number of good short and medium-length problems that deal