In a standard cost system, how are variances calculated and analyzed?

• A. A standard cost system relies solely on actual costs with no standard benchmarks.
• B. A standard cost system uses predetermined costs only for labor.
• C. Variances are calculated as standard costs minus actual costs.
• D. A standard cost system uses predetermined costs for materials, labor, and overhead; variances = actual costs minus standard costs; analyze price and quantity variances.

Answer: (D)

In a standard cost system, you compare what should have happened with what actually happened using predetermined costs for each input. These standard costs are set for materials, labor, and overhead, providing benchmarks for control and planning. Variances are the differences between actual costs and these standard costs, and they’re recorded using the rule actual minus standard. This convention makes the sign intuitive: actual costs above standards are unfavorable, and actual costs below standards are favorable.

Those variances are analyzed by splitting them into price (rate) variances and quantity (efficiency) variances. Price variances examine whether you paid more or less per unit of input than planned, while quantity variances look at whether you used more or fewer units than the standard quantity allowed, applying the standard cost per unit. Since overhead is included in the standard costs, you can also break out overhead variances using the same approach.

So the best description is that a standard cost system uses predetermined costs for materials, labor, and overhead; variances are calculated as actual costs minus standard costs; and you analyze them into price and quantity variances.