They train the employees to put two tablespoons of butter on each bag of popcorn, so total butter usage is based on the number of bags of popcorn sold. Therefore, if the theater sells 300 bags of popcorn with two tablespoons of butter on each, the total amount of butter that should be used is 600 tablespoons. Management can then compare the predicted use of 600 tablespoons of butter to the actual amount used.

A statistical term that measures the dispersion of a variable

around its expected value. The standard deviation is often used as

a measure of risk when applied to a return on an investment. A normal distribution with a mean of 0 and a standard deviation of 1. The planned reduction of similar parts through the standardization

of parts among multiple products.

Contents

## Module 10: Cost Variance Analysis

A company can compute these materials variances and, from these calculations, can interpret the results and decide how to address these differences. The materials price variance of $ 6,000 is considered favorable since the materials were acquired for a price less than the standard price. If the actual price had exceeded the standard price, the variance would be unfavorable because the costs incurred would have exceeded the standard price. We do not show variances with a negative or positive but at the absolute value with favorable or unfavorable specified. The amount by which actual cost differs from standard cost is called a variance.

- The planned reduction of similar parts through the standardization

of parts among multiple products. - In our example, the standard direct materials cost to manufacture one computer case is $22.80.
- In this case, the actual price per unit of materials is $9.00, the standard price per unit of materials is $7.00, and the actual quantity purchased is 20 pounds.
- Actual costs may differ from standard costs for materials because the price paid for the materials and/or the quantity of materials used varied from the standard amounts management had set.
- It means if everything proceeds as planned, the total expenses of a pound of plastic available for use should be $5.70 .

A favorable outcome means you spent less on the purchase of materials than you anticipated. If, however, the actual price paid per unit of material is greater than the standard price per unit, the variance will be unfavorable. An unfavorable outcome means you spent more on the purchase of materials than you anticipated. According to above computations the final standard price of one pound of plastic is $5.70. It means if everything proceeds as planned, the total expenses of a pound of plastic available for use should be $5.70 . The occurrences of deviation from standards are very normal and the common reasons of these deviations are explained on direct materials price variance page.

## Fundamentals of Direct Materials Variances

Still unsure about material and labor variances, watch this Note Pirate video to help. Also called the normal deviate, the distance of one data point from the mean, divided by

the standard deviation of the distribution. We present additional data regarding the production activities of the company as needed.

## Committee, AIMR Performance Presentation Standards Implementation Committee

A federal Act creating standards of overtime

pay, minimum wages, and payroll recordkeeping. A federal Act requiring federal contractors to pay overtime for hours worked exceeding 40 per week. A firm that reacts to excess supply or excess demand by adjusting quantity rather than price.

## 2 Compute and Evaluate Materials Variances

Determine whether a variance is favorable or unfavorable by reliance on reason or logic. If more materials were used than the standard quantity, or if a price greater than the standard price was paid, the variance is unfavorable. Accountants determine whether a variance is favorable or the custodial parent unfavorable by reliance on reason or logic. Another element this company and others must consider is a direct materials quantity variance. The difference between the actual and budgeted quantities

of material used in the production process, multiplied by the standard cost per

unit.

If, however, the actual quantity of materials used is greater than the standard quantity used at the actual production output level, the variance will be unfavorable. An unfavorable outcome means you used more materials than anticipated to make the actual number of production units. With either of these formulas, the actual quantity used refers to the actual amount of materials used at the actual production output. The standard quantity is the expected amount of materials used at the actual production output. If there is no difference between the actual quantity used and the standard quantity, the outcome will be zero, and no variance exists. If the actual price paid per unit of material is lower than the standard price per unit, the variance will be a favorable variance.

## Quantity Adjuster

By showing the total materials variance as the sum of the two components, management can better analyze the two variances and enhance decision-making. Figure 8.3 shows the connection between the direct materials price variance and direct materials quantity variance to total direct materials cost variance. In this case, the actual price per unit of materials is $9.00, the standard price per unit of materials is $7.00, and the actual quantity purchased is 20 pounds.

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