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Introduction to Variance in Decision making

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Standard Costing and Variance Analysis February 6th 2007 1 Lecture and Reading Objectives • Outline the nature and purpose of an operational control system and the role of budgets, standards and variances. • Explain how standard costs are set and define basic, ideal and currently attainable standards • Compile flexible budgets and from these calculate labour, materials overhead and sales variances and reconcile actual profit with budgeted profit • Identify the causes of variances and discuss the factors leading to the decision to investigate variances • Discuss the limitations of traditional standard costing systems and assess alternatives 2 Essential Reading • Drury Chapters 12, 15 and 16 (pages 461 and 468-482) • Drury C (1999) ‘Standard costing: a technique at variance with modern management?’, Management Accounting, November • Graham C, Lyall D and Puxty A (1992) ‘Cost control: the managers perspective’ Management Accounting, October • Kaplan RS and Norton DP (2000) ‘The Balanced Scorecard – Measures that Drive Performance.’ Harvard Business Review, January-February, pages 71-79. 3 An overview of a standard costing system 4 Budgets & Standard Costs • Prepare the budget using standard costs and budgeted prices • Q: Should we compare the budgeted output with the actual output to calculate the variances? • A: No, first flex the budget • Flex the budget for changes in activity level (changes in units of output) • Calculate t ...
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