Cost, budgeting, and variance
The Variance Engine
Build the three-column model, split price from quantity, and label each variance favorable or unfavorable by its effect on income.
How the exam words it
- -The stem gives standard and actual prices and quantities and asks for a materials price or quantity variance.
- -It gives standard and actual hours and rates and asks for the labor rate or efficiency variance.
- -It gives actual overhead with a standard rate and asks for a variable-overhead spending or a fixed-overhead volume variance.
- -It gives budgeted and actual units with a budgeted contribution margin and asks for the sales volume variance.
The playbook
- 1Compute the standard quantity allowed as the standard input per unit times actual output, the flexible-budget benchmark.
- 2Lay out three columns: actual price times actual quantity, standard price times actual quantity, and standard price times standard quantity allowed.
- 3Read the price or rate or spending variance from the first two columns and the quantity or efficiency variance from the last two.
- 4Value the sales volume variance at the budgeted contribution margin, and label every variance favorable when it raises income and unfavorable when it lowers it.
The trap
Using budgeted output rather than actual output for the standard quantity allowed, or multiplying an efficiency variance by the actual instead of the standard rate.
How the exam varies it
The same pattern, re-skinned along these axes:
Price or rate variance versus quantity or efficiency varianceMaterials, labor, variable overhead, or fixed overheadA cost variance versus a sales price or volume variance
Drill this pattern
8 questions of The Variance Engine from across the AUD topics. Clear it by getting 5 right with a streak of 3.