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Finance for Non-Financial Managers
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Manufacturing Cost Variances—Analysis for Action
Using standard costing enables a manufacturer to budget the
unit costs of production and to compare actual costs with stan-
dard costs in its financial reporting. The benefit of such report-
ing is not simply seeing whether the two agree or not or even by
how much they disagree. The power of standard costing is in
analyzing those differ-
ences and using that infor-
Variance analysis
Process of identifying, mation to enable man-
measuring, and investigating agers to change what
causes of significant differences (vari- they’re doing, in order to
ances) between budget expectations make the business opti-
and actual results. Variances can be mally profitable. That
calculated according to time, volume, analysis is called variance
cost, efficiency, and price.
analysis, meaning the
analysis of variances, or
differences, to enable managers to learn how to eliminate them.
The advantages of standard costing include the following:
• helping to more easily estimate inventory value and prod-
uct cost
• enabling price setting and contract bidding based on real-
istic costs
• permitting performance measurement and evaluation
based on standards
• quickly identifying problem areas through the principles of
management by exception
• identifying causes of unsatisfactory performance so that
corrections can be made
We’ll discuss variance analysis in some detail in Chapter 10,
because variance analysis is the principal tool for getting the
most value out of budgets in general, but it has particular appli-
cation in manufacturing, when standard costs are used, and so
it belongs in this chapter as well.
In standard costing, there are two basic kinds of variances,