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Principles of Accounting, Volume 2: Managerial Accounting

Why It Matters

Principles of Accounting, Volume 2: Managerial AccountingWhy It Matters
Picture of a cup of coffee beside a board with various pastries.
Figure 8.1 Coffee Shop. How do they know what each cup of coffee, muffin, or bagel costs so they can determine what price to charge? (credit: modification of “Bakery Coffee” by “veerasantinithi”/Pixabay, CC0)

Chapter Outline

8.1 Explain How and Why a Standard Cost Is Developed
8.2 Compute and Evaluate Materials Variances
8.3 Compute and Evaluate Labor Variances
8.4 Compute and Evaluate Overhead Variances
8.5 Describe How Companies Use Variance Analysis

Sam saw how much coffee his fellow students were drinking and decided to open a student-run coffee shop on campus. Sam knew that developing a plan for the coffee shop would help make the shop successful. He researched what types of coffee to offer, the hours the shop would be open, and the number of employees needed, by researching other coffee shops near campus. He brewed coffee to determine the cost of the coffee and the time it took to brew. He also served several friends to determine how long it would take to serve customers. He observed, in other coffee shops, how much cream and other additives are used by customers. He talked to several coffee suppliers for prices of his various materials. He looked at empty stores near campus to determine what his rent would be. Now that he has this information, he is not sure how to make it useful to him. How could he use this information to plan and control the operations of the shop? One calculation he can do is determine his standard costs.

What is the difference between a budget and a standard? A budget usually refers to a company’s projections for costs, revenues, and cash flows associated with the overall operations of the organization, or a subsection of the corporation such as a division. A standard usually refers to a company’s projected costs for a single unit of a product or service and includes the expected, or standard, cost for the various cost components of each unit, such as materials, labor, and overhead.

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