Setting Standards and Measuring Performance

Standard costing involves setting expected costs for materials, labor, and overhead. Variance analysis compares actual costs to these standards to identify areas for improvement.

How It Works

• Set standard costs for products.
• Record actual costs during production.
• Calculate variances (differences) between standard and actual costs.
• Investigate significant variances to improve efficiency.

Types of Variances

• Material Variance: Difference in material cost.
• Labor Variance: Difference in wage cost.
• Overhead Variance: Difference in indirect costs.

Real-World Example

A smartphone manufacturer notices that labor costs are higher than the standard, prompting an investigation into production delays.

Formula for Variance

\[ \text{Variance} = \text{Actual Cost} - \text{Standard Cost} \]