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Cost Accounting

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 Page 2


Definition
The Institute of Cost & Management Accountants defines 
variance as the difference between a standard cost and the 
comparable actual cost incurred during a period
Variance Analysis can be defined as the process of 
computing the amount of and isolating the cause of 
variances between actual costs and standard costs. It 
involves two phases:
1.Computation of individual variances
2.Determination of the cause(s) of each variance
Page 3


Definition
The Institute of Cost & Management Accountants defines 
variance as the difference between a standard cost and the 
comparable actual cost incurred during a period
Variance Analysis can be defined as the process of 
computing the amount of and isolating the cause of 
variances between actual costs and standard costs. It 
involves two phases:
1.Computation of individual variances
2.Determination of the cause(s) of each variance
?
Describe the basic concepts underlying variance 
analysis
?
Explain the difference between a favourable and 
an adverse/unfavourable variance
?
Compute materials usage and price variances
?
Calculate labour efficiency and price/wage rate 
variances
3
Page 4


Definition
The Institute of Cost & Management Accountants defines 
variance as the difference between a standard cost and the 
comparable actual cost incurred during a period
Variance Analysis can be defined as the process of 
computing the amount of and isolating the cause of 
variances between actual costs and standard costs. It 
involves two phases:
1.Computation of individual variances
2.Determination of the cause(s) of each variance
?
Describe the basic concepts underlying variance 
analysis
?
Explain the difference between a favourable and 
an adverse/unfavourable variance
?
Compute materials usage and price variances
?
Calculate labour efficiency and price/wage rate 
variances
3
Comparison
Care to be taken while comparing actual and standard cost
1.Conditions might have changed, thus rendering the standard costs unrealistic – for 
instance the quality of available materials may be low.
2.Standards fixed upon on too idealistic a basis will remain unattainable.
3.The service rendered by a service departments may not be upto the mark so that, for 
example time is lost due to a machine working slow.
4.In certain activities, fixation of standard is either not possible or not desirable. Goods 
requiring artistic work of high quality cannot be and should not be subject to quantitative 
standards. In certain cases work cannot be properly measured. Standards in these cases 
will be useless.
Page 5


Definition
The Institute of Cost & Management Accountants defines 
variance as the difference between a standard cost and the 
comparable actual cost incurred during a period
Variance Analysis can be defined as the process of 
computing the amount of and isolating the cause of 
variances between actual costs and standard costs. It 
involves two phases:
1.Computation of individual variances
2.Determination of the cause(s) of each variance
?
Describe the basic concepts underlying variance 
analysis
?
Explain the difference between a favourable and 
an adverse/unfavourable variance
?
Compute materials usage and price variances
?
Calculate labour efficiency and price/wage rate 
variances
3
Comparison
Care to be taken while comparing actual and standard cost
1.Conditions might have changed, thus rendering the standard costs unrealistic – for 
instance the quality of available materials may be low.
2.Standards fixed upon on too idealistic a basis will remain unattainable.
3.The service rendered by a service departments may not be upto the mark so that, for 
example time is lost due to a machine working slow.
4.In certain activities, fixation of standard is either not possible or not desirable. Goods 
requiring artistic work of high quality cannot be and should not be subject to quantitative 
standards. In certain cases work cannot be properly measured. Standards in these cases 
will be useless.
Classification
Variances are broadly classified into the following:
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