5.3 Standard Costing and Variance Analysis

Standard costing and variance analysis help organisations control costsThe sacrifices made when choosing a particular option, which may include money spent, time used, or resources consumed., evaluate performance, and identify areas for improvement. This module explores the concepts, methodologies, and applications of standard costing and variance analysis, providing practical insights into their use in decision-making.These standards are set for direct material cost, direct labourThe human effort used in production, including both physical and mental work as well as workers’ skills and knowledge. cost and overhead costs. This is to control costing, simplify the budgeting process and benchmark performance.

Variance Analysis

Variance analysis is the process of comparing actual costs to standard costs to identify deviations (variances). These variances help pinpoint areas of inefficiency or exceptional performance.