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17-Oct-2019 18:34

Allowing for normal inefficiencies, the product is expected to require 0.50 hours of labor at a cost of 15.00 per labor hour.

Variable overhead is allocated to the cost of the product based on the number of labor hours used at the standard rate of 5.00 per labor hour Fixed overhead is allocated to the cost of the product based on the number of labor hours used at the standard rate of 2.60 per labor hour.

The variance is the difference between the standard units and the actual units used in production, multiplied by the standard price per unit.

The standard costing variance is negative (unfavorable), as the actual units used are higher than the standard units, and the business incurred a greater cost than it expected to.

It is the repetitive nature of the production process which allows reliable and accurate standards to be established.

The standard costs set should be realistic and achievable based on accurate historical or comparable industry data such as material and labor usage.

The business will now allocate 2.60 of fixed overhead for every labor hour used during production.

If the business actually uses 4,600 hours at the standard rate is would allocate 4,600 x 2.60 = 11,960 to the inventory, and the standard costing quantity variance is given as follows: In this standard costing variance example, the volume variance is negative (unfavorable), as the actual labor hours allocated (4,600) were lower than the budgeted hours (5,000) used when calculating the standard rate.

The standard cost quantity variance is sometimes referred to as the efficiency variance or usage variance.The difference between the standard (expected) volume of production and the actual volume of production, gives rise to the standard cost volume variance.For example, if a business allocates fixed overhead based on the number of labor hours, and budgets a fixed overhead of 13,000 and expects to use 5,000 labor hours, then the standard fixed overhead rate set at the start of the year would be 13,000 / 5,000 = 2.60.If the original standards are set incorrectly, then the variances produced against those standards will also be incorrect and misleading, resulting in poor management decisions being made by the business.As an example, consider a manufacturing business, for each product it might set standards for each of its major cost types along the following lines: Allowing for normal wastage, the product is expected to need 2.00 units of material at a cost of 4.00 per unit.

The standard cost quantity variance is sometimes referred to as the efficiency variance or usage variance.The difference between the standard (expected) volume of production and the actual volume of production, gives rise to the standard cost volume variance.For example, if a business allocates fixed overhead based on the number of labor hours, and budgets a fixed overhead of 13,000 and expects to use 5,000 labor hours, then the standard fixed overhead rate set at the start of the year would be 13,000 / 5,000 = 2.60.If the original standards are set incorrectly, then the variances produced against those standards will also be incorrect and misleading, resulting in poor management decisions being made by the business.As an example, consider a manufacturing business, for each product it might set standards for each of its major cost types along the following lines: Allowing for normal wastage, the product is expected to need 2.00 units of material at a cost of 4.00 per unit.The quantity available times the product unit cast will give you the total inventory value.