Q10RQ - Horngren'S Financial And Managerial Accounting

Question

Question: Give the general formulas for determining cost and efficiency variances.

Step-by-Step Solution

Answer

Answer

The general formulae for cost variance are given by the product of actual quantity and the difference between actual cost and standard cost. The general formulae for efficiency variance are given by the product of standard quantity and the variation among actual quantity and standard quantity.

Step 1 General formula for determining cost variances

The cost variances are computed by using the following formulae

$$\begin{gathered} \mathbf{CostVariance}\mathbf{=}\left(\mathbf{ActualCost}\mathbf{\times }\mathbf{ActualQuantity}\right)\mathbf{-}\left(\mathbf{StandardCost}\mathbf{\times }\mathbf{ActualQuantity}\right) \\ \mathbf{=}\left(\mathbf{Actualcost}\mathbf{-}\mathbf{Standardcost}\right)\mathbf{\times }\mathbf{ActualQuantity} \\ \mathbf{=}\left(\mathbf{AC}\mathbf{-}\mathbf{SC}\right)\mathbf{\times }\mathbf{AQ} \end{gathered}$$

Step 2 General formula for determining efficiency variances

The efficiency variances are computed by using the following formulae

$$\begin{gathered} \mathbf{CostVariance}\mathbf{=}\left(\mathbf{StandardCost}\mathbf{\times }\mathbf{ActualQuantity}\right)\mathbf{-}\left(\mathbf{StandardCost}\mathbf{\times }\mathbf{StandardQuantity}\right) \\ \mathbf{=}\left(\mathbf{Actualcost}\mathbf{-}\mathbf{Standardcost}\right)\mathbf{\times }\mathbf{StandardCost} \\ \mathbf{=}\left(\mathbf{AQ}\mathbf{-}\mathbf{SQ}\right)\mathbf{\times }\mathbf{SC} \end{gathered}$$