Vaughn Company uses standard costing and recognizes all variances as soon as they are known. In the year just ended, Vaughn debited the DM Inventory account for $554,600 when it purchased DM on account. It further credited DM Inventory for $486,685 when it transferred materials into production, while debiting WIP Inventory for $535,800 to recognize the standard DM cost of these units produced. The company accrued $817,950 in wages to its production workers for this period's 54,530 hours of work. Also known by the end of the year were the following two variances: the DM price variance was $17,700 unfavorable, and the DL flexible budget variance was $19.950 unfavorable. Partial information on the company's DM and DL standards are reproduced here: Direct materials Direct labor 6 pounds/unit 3 hours/unit @ $4.70/pound $_/hour
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
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