Design Details: Variance

Variance is defined as the difference between the actual cost and the standard cost, as described in the following formula.

actual cost – standard cost = variance

If the actual cost changes, for example, because you post an item charge on a later date, then the variance is updated accordingly.

Note

Revaluation does not affect the variance calculation, because revaluation only changes the inventory value.

Example

The following example illustrates how variance is calculated for purchased items. It is based on the following scenario:

1. The user purchases an item at $ 90.00, but the standard cost is $ 100.00. Accordingly, the purchase variance is $ –10.00.
2. $ 10.00 is credited to the purchase variance account.
3. The user posts an item charge of $ 20.00. Accordingly, the actual cost is increased to $ 110.00, and the value of the purchase variance becomes $ 10.00.
4. $ 20.00 is debited to the purchase variance account. Accordingly, the net purchase variance becomes $ 10.00.
5. The user revalues the item from $ 100.00 to $ 70.00. This does not affect the variance calculation, only the inventory value.

The following table shows the resulting value entries.

Determining the Standard Cost

The standard cost is used when calculating variance and the amount to capitalize. Since the standard cost can be changed over time because of manual update calculation, you need a point in time when the standard cost is fixed for variance calculation. This point is when the inventory increase is invoiced. For produced or assembled items, the point when standard cost is determined is when the cost is adjusted.

The following table shows how different cost shares are calculated for produced and assembled items when you use the Calculate Standard Cost function.

Cost Share	Purchased Item	Produced/Assembled Item
Standard Cost		Single-Level Material Cost + Single-Level Capacity Cost + Single-Level Subcontrd. Cost + Single-Level Cap. Ovhd. Cost + Single-Level Mfg. Ovhd. Cost
Single-Level Material Cost	Unit Cost
Single-Level Capacity Cost	Not applicable
Single-Level Subcontrd. Cost	Not applicable
Single-Level Cap. Ovhd Cost	Not applicable
Single-Level Mfg. Ovhd Cost	Not applicable	(Single-Level Material Cost + Single-Level Capacity Cost + Single-Level Subcontrd. Cost) * Indirect Cost % / 100 + Overhead Rate
Rolled-up Material Cost	Unit Cost
Rolled-up Capacity Cost	Not applicable
Rolled-Up Subcontracted Cost	Not applicable
Rolled-up Capacity Ovhd. Cost	Not applicable
Rolled-up Mfg. Ovhd. Cost	Not applicable

See Also

Design Details: Inventory Costing
Design Details: Costing Methods Managing Inventory Costs
Finance
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