Production Cost Variance in Standard Costing
Production Cost Variance in standard costing is a critical metric used to analyze the efficiency and cost control within a manufacturing process. It represents the difference between the standard cost of actual production and the actual cost incurred. This variance is used to assess whether operations are under cost control or need adjustments to improve cost efficiency.
Detailed Definition
Production cost variance arises when there is a difference between the standard cost allocated for the actual level of production and the actual cost incurred. This variance can either be favorable or adverse:
- Favorable Variance: Occurs when the actual cost is less than the standard cost.
- Adverse Variance: Occurs when the actual cost is greater than the standard cost.
The production cost variance is typically divided into three main categories:
- Direct Materials Total Cost Variance: Difference between the standard cost and actual cost of materials used for production.
- Direct Labour Total Cost Variance: Difference between the standard cost and actual cost of labor employed in production.
- Overhead Total Variance: Difference between the standard overhead allocated to production and the actual overhead incurred.
These variances can further be broken down into sub-parameters such as expenditure variance and efficiency variance to pinpoint specific areas needing attention.
Examples
-
Direct Materials Variance Example:
- Standard Cost: $10,000
- Actual Cost: $8,000
- Variance: $2,000 (Favorable)
-
Direct Labour Variance Example:
- Standard Cost: $6,000
- Actual Cost: $7,000
- Variance: $1,000 (Adverse)
Frequently Asked Questions (FAQs)
Q1: Why is production cost variance important?
- A: Production cost variance is crucial as it helps in identifying inefficiencies and areas that exceed budgeted costs. This information is vital for making informed managerial decisions to improve cost control and operational efficiency.
Q2: What causes production cost variance?
- A: Causes can include changes in raw material prices, variations in labor efficiency, unexpected overhead costs, and inefficiencies in the production process.
Q3: How do you calculate production cost variance?
- A: Production cost variance is calculated by subtracting the actual cost of production from the standard cost allotted for the actual production level.
Q4: What is the difference between favorable and adverse variance?
- A: Favorable variance occurs when actual costs are less than standard costs, indicating efficient use of resources. Adverse variance occurs when actual costs exceed standard costs, suggesting inefficiency or overspending.
Related Terms
- Standard Costing: A costing method that assigns standard costs rather than actual costs to cost items.
- Variance Analysis: The process of analyzing the differences between standard and actual figures.
- Direct Materials Total Cost Variance: Variance between the standard and actual costs of materials.
- Direct Labour Total Cost Variance: Variance between the standard and actual labor costs.
- Overhead Total Variance: Variance between the standard and actual overhead allocated to production.
Online References
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Advanced Cost Accounting” by Jae K. Shim and Joel G. Siegel
- “Principles of Cost Accounting” by Edward J. Vanderbeck and Maria R. Mitchell
Accounting Basics: “Production Cost Variance” Fundamentals Quiz
### What is production cost variance?
- [ ] The total cost of a production.
- [x] The difference between the standard cost and actual cost of production.
- [ ] The cost of materials in production.
- [ ] A type of overhead cost.
> **Explanation:** Production cost variance measures the difference between the standard cost allocated for production and the actual cost incurred.
### What is a favorable variance?
- [ ] When actual cost exceeds standard cost.
- [x] When the actual cost is less than the standard cost.
- [ ] When costs remain the same.
- [ ] Variance in overheads only.
> **Explanation:** A favorable variance occurs when the actual cost of production is less than the standard cost, indicating efficient resource use.
### Which component is NOT part of production cost variance?
- [ ] Direct materials total cost variance.
- [ ] Direct labour total cost variance.
- [ ] Overhead total variance.
- [x] Selling and administrative expenses.
> **Explanation:** Selling and administrative expenses are not considered part of production cost variance which focuses on direct materials, direct labor, and overhead.
### How can production cost variance be further analyzed?
- [x] By breaking it into expenditure and efficiency variances.
- [ ] By auditing all expenses.
- [ ] By evaluating sales performance.
- [ ] By assessing customer feedback.
> **Explanation:** Production cost variance can be further broken down into expenditure and efficiency variances to identify specific cost elements that need management attention.
### What does an adverse variance indicate?
- [ ] Efficient cost management.
- [x] Costs exceed the standard cost.
- [ ] Reduced production output.
- [ ] Standard costs are higher than actual costs.
> **Explanation:** An adverse variance indicates that the actual costs have exceeded the standard costs, suggesting inefficiency or overspending.
### In standard costing, what does a variance help identify?
- [ ] Profit margins.
- [ ] Sale trends.
- [x] Cost control issues.
- [ ] Revenue growth.
> **Explanation:** Variance helps in identifying cost control issues and areas where the actual costs deviate from the standard cost, requiring managerial action.
### What type of variance occurs when the cost of materials used in production is less than expected?
- [x] Favorable direct materials variance.
- [ ] Adverse direct labor variance.
- [ ] Favorable overhead variance.
- [ ] Sales price variance.
> **Explanation:** A favorable direct materials variance occurs when the actual cost of materials is less than what was budgeted in the standard cost.
### Why is analyzing overhead variances important?
- [ ] To monitor production levels.
- [x] To control indirect costs.
- [ ] To track labor efficiency.
- [ ] To set standard costs.
> **Explanation:** Analyzing overhead variances is important for controlling indirect costs that are not directly tied to production but essential for manufacturing operations.
### Which of the following is an example of a favorable variance?
- [x] Actual direct labor cost is less than the standard direct labor cost.
- [ ] Actual overhead cost exceeds standard overhead cost.
- [ ] Actual material usage is more than the standard material.
- [ ] Standard cost matched actual cost.
> **Explanation:** A favorable variance is when the actual direct labor cost is less than the expected standard labor cost, indicating efficient labor use.
### Which type of variance analysis focuses on deviations in output efficiency?
- [ ] Expenditure variance.
- [x] Efficiency variance.
- [ ] Material price variance.
- [ ] Overhead absorption variance.
> **Explanation:** Efficiency variance analysis focuses on deviations in the actual productivity and output relative to standard expectations.
Thank you for exploring our detailed article on production cost variance in standard costing and tackling our quiz. Keep honing your knowledge!
