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Chapter 11

Standard Costs and Variance Analysis

Learning Objectives

  1. Explain how standard costs are developed.
  2. Calculate and interpret variances for direct material.
  3. Calculate and interpret variances for direct labor.
  4. Calculate and interpret variances for manufacturing overhead.
  5. Calculate the financial impact of operating at more or less than planned capacity.
  6. Discuss how the management-by-exception approach is applied to the investigation of standard cost variances.
  7. Explain why a favorable variance may be unfavorable, how process improvements may lead to unfavorable variances, and why evaluation in terms of variances may lead to overproduction.

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At the start of the year, Darrington Ice Cream budgeted material costs at $2 per gallon.

During the year, the company produced 1,000,000 gallons, and the material cost was approximately $2,200,000. Linda Evert, director of operations, immediately called a meeting of the plant manager and the production supervisor. Linda's opening statement grabbed their attention. “What's going on? Our actual costs are 10 percent higher than budgeted.” Both managers assured her that the increased costs were not due to waste in the use of materials. The plant manager was confident that the increased costs resulted from a sudden jump in sugar and milk ...

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