Budgets Formal written plans that represent management’s planned actions in the future and the impacts of these actions on the business.

Flexible budget A budget that shows the budgeted amount of manufacturing overhead for various levels of output; used in isolating overhead variances and setting standard overhead rates.

Ideal standards Standards that can be attained under the best circumstances—that is, with no machinery problems or worker problems. These unrealistic standards can only be met when the company has highly efficient, skilled workers who are working at their best effort throughout the entire period needed to complete the job.

Fixed overhead variance A variance from standard caused by using more or less than the standard amount of fixed overhead costs to produce a product or complete a process; computed as Actual fixed overhead – Budgeted fixed overhead.

Labor efficiency variance (LEV) A variance from standard caused by using more or less than the standard amount of direct labor-hours to produce a product or complete a process; computed as (Actual hours worked – Standard hours allowed) x Standard rate per hour.

Labor rate variance (LRV) A variance from standard caused by paying a higher or lower average rate of pay than the standard cost to produce a product or complete a process; computed as (Actual rate -Standard rate) x Actual hours worked.

Management by exception The process where management only investigates those variances that are unusually favorable or unfavorable or that have a material effect on the company.

Materials price variance (MPV) A variance from standard caused by paying a higher or lower price than the standard for materials purchased; computed as (Actual price – Standard price) x Actual quantity purchased.

Materials usage variance (MUV) A variance from standard caused by using more or less than the standard amount of materials to produce a product or complete a process; computed as (Actual quantity used – Standard quantity allowed) x Standard price.

Overhead Base The overhead base is how overhead is applied to a product and is typically based on direct labor hours, direct labor dollars or machine hours.

Practical standards Standards that are strict but attainable. Allowances are made for machinery problems and rest periods for workers. These standards are generally used in planning.

Standard cost A carefully predetermined measure of what a cost should be under stated conditions.

Standard level of output A carefully predetermined measure of what the expected level of output should be for a specified period of time, usually one year.

Variance A deviation of actual costs from standard costs; may be favorable or unfavorable. That is, actual costs may be less than or more than standard costs. Variances may relate to materials, labor, or manufacturing overhead.

Variable Overhead Spending variance (VOHSV) A variance from standard caused by incurring more actual variable overhead than the standard variable overhead cost to produce a product or complete a process; computed as (Actual variable OH rate -Standard variable OH rate) x Actual amount of base.

Variable Overhead Efficiency variance (VOHEV) A variance from standard caused by using more or less than the standard amount of overhead application base to produce a product or complete a process; computed as (Actual OH base – Standard OH base) x Standard variable OH rate per base.