Standard Costs and Variance Analysis - Cost Accounting Techniques, Cost Accounting Video Lecture | Cost Accounting - B Com

in our last video we talked about the
notion of flexible budgeting with the
main idea being that we can take our
initial budget that we use for planning
purposes and then we can turn it into a
flexible budget that is basically
adjusted it's our regular is our
original budget but it's been adjusted
for the change in activity right so if
we expected a hundred customers when we
put together our original budget and
then with the flexible budget all we say
oh well we actually had 150 customers
well the differences in cost and so
forth might be driven by the fact that
we have fifty more customers than we
expected when we put together original
budget and so therefore we've adjusted
for that we've kind of control for that
with the flexible budget and updated our
original budget totals however when we
take that flexible budget we notice that
when we see okay we look at the
difference with the actual numbers right
so the flexible budget is still planned
numbers it's just just been updated to
reflect the actual activity level but
the numbers are still budgeted
expectations but when we look at the
actual numbers we could still see
differences between the flexible budget
and between the actual results for our
company so we talked about a movie
theater and the idea of popcorn expense
right so when we say okay well we've
we've adjusted our budget now we've got
this flexible budget and based on the
flexible budget based on 150 customers
or what have you that activity level we
should have expected an expense of 700
but then we say well wait our actual
expense was 850 so that leads us to say
well we've got a variance here we define
this notion of a variance basically just
being a difference and we'll say it's a
hundred and fifty and it's unfavorable
right that means we basically spent a
hundred and fifty dollars more on
popcorn then we budgeted even after
controlling for the fact that our
activity level was higher and so now we
know that we've got this red flag here
and say hey we've we've got this
variance maybe a manager should look
into this but we still don't understand
well is this because of the price is
that we spent too much money on on the
popcorn or is it because the quantity
does it have to do with that we
used too much popcorn we're putting too
much popcorn into each bucket what why
is it what's driving this unfavorable
variance and we really didn't get into
that with flexible budgeting and so this
is where the notion of standard costing
and variance analysis comes in because
now we can actually go and say well
let's let's take let's say that there's
a standard amount standard amount of
popcorn that we think is acceptable to
put into each bucket and then we say
that there's a standard price that we're
willing to pay a standard price that we
think is a good price for popcorn and so
we could take these standards and then
compare them to the actual amounts and
then that will give us an idea where we
can parse out and say oh wait a minute
this this this variance that we're
having is due to us spending too much on
popcorn or wait maybe no maybe it's this
that we're spent we're just using too
much popcorn maybe we're wasting some or
maybe it's a combination of the two so
let's jump in into an example and I
think it'll be a little easier to
understand so let's let's stick with the
idea that you own a movie theater and
you determined that the standard amount
of popcorn so the circle this amount
we're talking about the standard it's a
standard amount of popcorn is that you
think one quarter of a pound a quarter
pound of popcorn should go into each
bucket and let's let's just say one size
fits all you've got one size you don't
have a large a huge size like you just
have once at one bucket of popcorn and
so for that one size of popcorn there
should be a quarter pound of popcorn in
each bucket now I have no height if that
is way too much popcorn or nap or too
little but let's just go with it now
when you think about the standard price
of the popcorn you basically say okay
well we purchase popcorn from our
supplier and we think that based on
historical trends and so forth a dollar
fifty a pound it is basically where we
think we should be paint with that's
what we think we should be paying for
our popcorn now again I have no idea how
realistic that is but these are the
standard totals that you come up with
right so now you've got an amount and
you also have a standard price now that
we've got these standards we have
something we can benchmark the actual
amounts right
so when we get this actual amount we
have something to compare it against and
we can figure out if it's price or
quantity issues that that are driving
our problems so now we need to know
obviously we have the standard amounts
here but we need to know the actual
results right if we don't have the
actual results we're not going to have
anything to compare to our standards and
so we say okay well the actual at the
end of the month we found that we spent
twenty two hundred dollars to buy eight
hundred pounds of popcorn now we used
all eight hundred pounds there's there's
nothing left over we use all eight
hundred pounds and ultimately we're able
to make thirty three hundred buckets of
popcorn with that and now we've got the
actual results and we've got the
standards so now we have something that
we can compare and there's this really
neat way that people have kind of come
up with for comparing these and so you
might want to make a notation this is a
very common way of looking at it we've
got our actual quantity so this aq is
actual quantity and then we've got our
actual price that's that's I think
that's very easy to understand so we
think our actual quantity and our actual
price now now let's go and let's just
I'll just write that out before we get
into explaining all this so we've got
800 pounds then we're going to multiply
that by two dollars and seventy-five
cents
okay now you might be wondering where
does this 275 come from so let's let's
calculate that so we've got 800 pounds
of popcorn that we bought right but we
bought it for $2,200 okay so we take
that $2,200 this is the total right and
we want to get per pound so we take the
2,200 and divide it by the 800 pounds
and that's going to give us 275 so I'll
just change colors here so this is just
going to be that 22 20 200 divided by
800 that gives us that at 275 that's per
pound so now let me let me change up
colors here again so now when we think
of the action
all results it's going to be $2,200 is
the actual quantity times the actual
price of the popcorn and now let me get
a little squiggly line separate this so
you understand that these are these are
different now we're going to go with the
actual quantity times the standard price
so the actual quantity is going to be
the same right it's still going to be
800 pounds 800 pounds but now we're
multiplying it by the standard price I'm
going to explain why in a moment so just
hang with me so our standard price is
going to be a dollar 50 a dollar 50
that's per pound and you might be saying
well why a dollar 50 we'll remember
that's the standard that we came up with
when we looked and said well what do we
think we should be paying for popcorn we
set a dollar 50 a pound so the actual
amount of 800 times the dollar 50 that's
going to be this middle column and
that's going to give us 1200 and maybe I
should I should change it again I'll
just I'll just make them all blue in
this bottom row so that's 1200 okay now
let's take a let's take a little little
step down here for a moment let's let's
take a look at these two totals and see
what we've come up with right I don't
want to I want you to have some of the
intuition here so let's convince your
common convention to draw a little bar
like this and what we've what we've got
is we've got a difference here between
2200 and 1200 right we've got a
difference of a thousand dollars right
so that's a thousand dollars and what
that is called is called the price
variance this is our price variance and
you say well why the price variance what
are we talking about here well that's
what we changed right we kept quantity
constant in each column we are where
combined we're multiplying by the actual
quantity what did we change we change
the price the actual price versus the
standard price so this variance here is
really telling us the
difference between the actual price and
the standard price of what we paid and
if we look we say okay well is this
thousand is that good thing or a bad
thing well we think okay what's the
standard price it's a dollar fifty and
the actual price is 275 so that means we
paid a dollar 25 more per pound for this
than what we what we had expected to do
under our standards so that's going to
be an unfavorable that's a you therefore
unfavorable that's an unfavorable
variance right so we have an unfavorable
price variance now we've said that that
was the first part rate we're trying to
figure out with the popcorn when we've
got the spending variance is it due to
the prize is the do do we to use too
much popcorn so now we have to get into
the quantity right so we have to deal
with that and we got to compute this
this final column to do that and so in
this final column now we're going to
have the standard quantity and the
standard price right so the standard
quantity is going to be 825 pounds now
tell you how I calculate that in a
moment
825 pounds and then the standard price
well we've already we already know that
right is that it's that dollar 50 we
already talked about that that was just
that was just given okay so that dollar
50 just copy that over now that's going
to equal that equals one thousand two
hundred and thirty seven dollars and
fifty cents okay so where did this 825
come from you might be saying so what we
did we want to know the standard
quantity all right so we used thirty
three hundred buckets of popcorn that's
the actual amount of popcorn we used
what's the standard amount of popcorn we
use per bucket well we decided it's one
quarter pound
Oh point 0.25 pounds per bucket so we
take the actual amount of buckets and
multiply it by the standard amount of
popcorn that's supposed to go in each
bucket right there so we just take and
let me let me change colors here again
so this 825 we get just by taking 3,300
and we multiply that by 0.25 okay that
is going to give us that 825 pounds
that's our standard quantity by our
standards for as many buckets of popcorn
as we made this is how many pounds of
popcorn it should have taken to do that
right so now we can go similarly just
like just like over here we computed
that price variance now we can go and we
can here I'll just go let me change up
colors so now we can go and just drag
this over here maybe that's a little too
far and drag it there that's terrible
line okay let's see if I can do that's a
little better so now we're going to have
our quantity variance point you know let
me put that now let me put that in a
different color to make it stand out
quantity variance and that is going to
be $37.50
and that's just the difference we just
take that 12 37 50 and we subtract that
1200 that difference that's our variance
right that's our difference in the
quantity and is it going to be favorable
or unfavorable well actually so if we
take a look at this a 25 by our
standards that's how many pounds of
popcorn we should have used given how
many buckets of popcorn we have so now
actually we only use 800 pounds of
popcorn to make that mini book so that's
actually a favorable variance now that
that might seem a little weird because
you might think well it again please
don't get too hung up on this favorable
thing because that might actually be a
people might be complaining say hey you
didn't put enough popcorn in my bucket
so just because it was a little bit
cheaper for us because we use fewer
pounds of popcorn doesn't necessarily
mean it's something we should be
celebrating but in any event now we can
go and we can take these and we can
actually come up we can come up with a
total variance so between these two now
we can say we have a total variance
total shoot let me keep getting stuck
with white
okay total variance is going to be and
now we just we just take the difference
of these two amounts and that's going to
be nine hundred and sixty-two dollars
nine hundred and sixty two dollars and
fifty cents and that's going to be
unfavorable because this we've got this
thousand unfavorable but it's offset a
little bit by this favorable so now we
see okay let's take a step back we've
got a nine hundred and sixty-two dollar
and fifty cent unfavorable valent
balance now upper management they're
going by and they say hey look look at
this popcorn
we really haven't a big unfavorable
variance there we should look into that
more oh what is it what is it oh it's
actually our price our price that's
driving it right so now you're getting a
little bit of a deeper analysis right we
said before are we spending too much is
that is that is that the problem when we
have that spending variance are we
spending too much or are we using too
much you should probably consistency
sake spending too much or using too much
well it looks like we're spending too
much we're paying too much for our
popcorn now maybe the price of popcorn
has has gone up and it's not it's not a
problem or something like that but
whatever the case is kind of a red flag
to our top management they hate we need
to look into this now you might say well
what does it matter whether we're
spending too much or using too much why
do we care and want to break it out in
this way where we have a price variance
and quantum of variance well the reason
is that a lot of firms especially larger
firms will have two different managers
that will be in charge of these right so
what you'll have is the prices you'll
have someone who's called the purchasing
manager that's their response that's his
or her responsibilities this purchasing
manager is their responsibility to to be
accountable for this variance and the
answer and say hey yeah I actually had a
lot of problems this this quarter or
there's there's some kind of issue with
the popcorn market it's their job to
answer for that right
then the quantity when we think about
the quantity now we think and again
we're like a larger firm we think of
somebody like a production manager is
going to have more influence and control
over how much of material we use to make
our products right now something like a
movie theater might be the same managers
the general managers responsible for
both but larger firms well hat will
actually have it where these these are
two different responsibilities and so we
want to really be able to to break this
out and say okay we know we have this
big variance here but how does it break
out right we've got this price and we've
got this quantity aspect and so we
really want to know who dropped the ball
or if it was a really good month or
quarter who's the one that should be
should get a bonus and so forth so we
really need to be able to know what what
is driving this total variance right