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:
- The user purchases an item at $ 90.00, but the standard cost is $ 100.00. Accordingly, the purchase variance is $ –10.00.
- $ 10.00 is credited to the purchase variance account.
- 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.
- $ 20.00 is debited to the purchase variance account. Accordingly, the net purchase variance becomes $ 10.00.
- 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 MethodsManaging Inventory Costs
Finance
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