Standard costing and variance analysis: How can we use this tool to track and analyze performance?

Standard costing and variance analysis

As a website content author specialising in search engine optimisation, keywords to optimise page conversion and post category tag manager, it’s important to understand standard costing and variance analysis.

This is especially important for businesses who want to improve their cost control and profitability.

In this guide, we’ll cover the basics of standard costing and variance analysis, how to use it, best practices, and real-world examples.

Getting Started

If you’re a business owner, manager, or accountant, then understanding standard costing and variance analysis is crucial.

Standard costing is a method of cost accounting that helps businesses determine the cost of producing a product or service.

Variance analysis, on the other hand, is the process of comparing actual costs to standard costs to identify any variances or deviations.

By understanding these two concepts, businesses can identify areas where they can improve their cost control and profitability.

How to

1. Set up a standard cost system by determining the standard cost of producing a product or service. This includes direct materials, direct labor, and overhead costs.
2. Track actual costs for each of these components, and compare them to the standard costs.
3. Calculate the variances for each component, and analyze the reasons for the variances.
4. Take action to improve cost control and profitability based on the analysis.

Best Practices

• Set realistic standard costs based on historical data and industry benchmarks.
• Regularly review and update standard costs to reflect changes in the business environment.
• Use variance analysis to identify areas for improvement and take action to address them.
• Communicate the results of variance analysis to relevant stakeholders to ensure everyone is on the same page.

Examples

Let’s say you own a bakery that produces cakes.

You’ve determined that the standard cost of producing a cake is $10, which includes $2 for direct materials, $3 for direct labor, and $5 for overhead costs.

However, when you compare the actual costs for producing a cake, you find that the direct materials cost is $3, the direct labor cost is $2, and the overhead cost is $6.

This means that you have a direct materials variance of $1 (favorable), a direct labor variance of $1 (unfavorable), and an overhead variance of $1 (unfavorable).

Based on this analysis, you can take action to address the unfavorable variances.

For example, you could look for ways to reduce overhead costs, such as by using more efficient equipment or renegotiating contracts with suppliers.

You could also look for ways to improve direct labor efficiency, such as by providing additional training to your staff or implementing more efficient production processes.

Originally published at Smart Accounting Kit.
This publication may contain affiliate links to external websites.