Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

16.3.2 Cost Analysis

Intended learning outcomes: Differentiate between volume variances in an internal operation, volume variances for a component, and variances in the costs per unit produced. Disclose various cost variances.



There are various causes for volume variances:

  • Volume variances in an internal operation. Here, the actual load differs from the standard load because:
    • Unanticipated incidents occur during production.
    • The work center efficiency or efficiency rate (in a time period) is better or worse than expected.
    • The specified quantity of standard capacity requirement is wrong, or the quantity consumed is recorded incorrectly.
    • Additional operations are needed for reworking.
  • Volume variances for a component or an external operation. The quantities consumed differ from the quantities specified on the bill of material or route sheet, because:
    • The wrong standards (estimates) were used.
    • Goods are lost or scrapped.
  • Variances in the costs per unit produced. If scrap is produced, the quantity actually produced may be less than the quantity ordered, in which case the cost of goods manufactured per unit produced will be higher than expected, because most of the components and resources were used for the initial operations in accordance with the original quantity ordered.

Standard costing reveals all these variances through a simple comparison of the job-order cost against the estimated cost accumulation. Since the underlying cost rates remain the same, the job-order cost accumulation highlights any volume variances.

Cost variances are deviations between actual and standard costs.

Cost accounting analyzes the various cost variances, namely:

  • Variances between the actual costs of the purchased components and the standard costs for the same items.
  • Variances of the actual costs of a capacity unit of a work center. The costs per capacity unit are predicted for the future based on past values in the form of a forecast. At the end of the budget period, this reveals variances arising from undercapacity or over­capacity, meaning that fixed costs should actually have been divided by a different load.

When basing costing on the actual costs, comparison of job-order and estimated-cost accumulations yields variances that encompass both volume and cost variances. To show these variances separately, we must add a third column that captures “actual quantities at standard cost rates.” However, we can only do this if we know the cost rates when we carry out the estimated-cost accumulation. But, if we specify only the total budget for each cost type, then we cannot show volume variances separately from cost variances.




Course section 16.3: Subsections and their intended learning outcomes

  • 16.3 Job-Order Costing

    Intended learning outcomes: Describe actual quantities and actual costs. Explain cost analysis. Produce an overview on the interface from order management to cost accounting.

  • 16.3.1 Actual Quantities and Actual Costs

    Intended learning outcomes: Identify actual quantities and actual order costs. Produce an overview on backflush costing. Differentiate between standard costing, normal costing, and actual costing in determining actual order costs.

  • 16.3.2 Cost Analysis

    Intended learning outcomes: Differentiate between volume variances in an internal operation, volume variances for a component, and variances in the costs per unit produced. Disclose various cost variances.

  • 16.3.3 Product Costing or Project Costing – The Interface from Order Management to Cost Accounting

    Intended learning outcomes: Produce an overview on various outputs from cost accounting. Present the various transactions handled by costing software.