In concept, standards and budgets are essentially the same.

Standards may be useful in setting selling prices for finished goods.

Ideal standards represent an efficient level of performance under normal operating conditions.

The materials price standard is based on the purchasing department”s best estimate of the cost of raw materials.

The direct labor quantity standard is based on current wage rates adjusted for anticipated changes such as cost of living adjustments included in many union contracts.

The standard predetermined overhead rate is based on an expected standard activity index.

An unfavorable variance suggests efficiencies in incurring costs and in using materials and labor.

The materials price variance is the difference between actual quantity of materials purchased times the standard cost and the standard quantity of materials times the standard cost.

The materials quantity variance is the difference between the standard cost times the actual quantity of materials used and the standard cost times the standard quantity used.

The materials price variance is normally caused by the production department.

Material quantity variances can be caused by inexperienced workers, faulty machinery, or carelessness.

The labor quantity variance is the difference between the actual rate times the standard hours and the standard rate times the standard hours.

The use of an inexperienced worker instead of an experienced employee can result in a favorable labor price variance but probably an unfavorable quantity variance.

An increase in the cost of indirect manufacturing costs such as fuel and maintenance may cause an overhead variance.

All variances should be reported to appropriate levels of management as soon as possible.

In using variance reports, top management normally looks carefully at every variance.

A standard cost system may be used with either job order or process costing.

Under a standard cost accounting system, a favorable labor price variance will result in a credit to Labor Price Variance.

The use of standard costs in inventory costing is prohibited in financial statements.

The overhead controllable variance is the difference between the actual overhead costs incurred and the budgeted costs for the standard hours allowed.