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8/4/2019 3901853 Standard Costing
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Standard Costing
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Standard Costs
ü Distinguish between a standard and a budget.ü Identify the advantages of standard costs.ü Describe how standards are set.ü State the formulas for determining direct materials and direct
labor variances.ü State the formulas for determining manufacturing overhead
variances.ü Discuss the reporting of variances.
Our Focus
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The Need for Standards
§ Standards• Are common in business• Are often imposed by government agencies (and
called regulations)§ Standard costs• Are predetermined unit costs• Used as measures of performance
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Distinguishing Between Standards andBudgets
§ Standards and budgets are both• Pre-determined costs
• Part of management planning and control
§ A standard is a unit amount whereas a budget is a total amount
• Standard costs may be incorporated into a cost accounting
system
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Advantages of Standard Costs
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Setting Standard Costs
§ Setting standard costs• Requires input from all persons who have responsibility for
costs and quantities• Standards costs need to be current and should be under
continuous review
§ There are two levels of standard costs• Ideal standards represent optimum levels of performance under
perfect operating conditions• Normal standards represent efficient levels of performance
attainable under expected operating conditions (rigorous butattainable)
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Direct Materials Price Standard
§ Direct materials price standard• Cost per unit which should be incurred
• Based on the purchasing department’s best estimate of the cost of raw materials
• Includes related costs such as receiving, storing, and handling
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Direct Materials QuantityStandard
§ Direct materials quantity standard• Quantity of direct materials used per unit of finished goods
• Based on physical measure such as pounds, barrels, etc.• Considers both the quantity and quality of materials required
• Includes allowances for unavoidable waste and normal storage
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Total Direct MaterialsCost/Unit
STANDARDDIRECT
MATERIALS
PRICE
x=
STANDARDDIRECT
MATERIALS
QUANTITY
STANDARDDIRECT
MATERIALSCOST
PER UNIT
§ The standard direct materials cost per unit is calculated as follows
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Direct Labor Price Standard
§ Direct labor price standard • Rate per hour incurred for direct labor
• Based on current wage rates adjusted for anticipatedchanges, such as cost of living adjustments
• Includes employer payroll taxes,and fringe benefits
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Direct Labor Quantity Standard
§ Direct labor quantity standard• Time required to make one unit of the product
• Critical in labor-intensive companies
•
Allowances should be made for rest periods, cleanup,machine setup and machine downtime
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Direct Labor
§ The standard direct labor cost per unit iscalculated as follows
STANDARDDIRECTLABOR
RATE
x =STANDARD
DIRECTLABOR HOURS
STANDARDDIRECT
LABOR COSTPER UNIT
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Manufacturing Overhead Standard
§ For manufacturing overhead, a standard predetermined overhead rate is used
• The predetermined rate is computed by dividing budgeted
overhead costs by an expected standard activity index• The standard manufacturing overhead rate per unit is the
predetermined overhead rate times the activity index quantitystandard (for example, direct labor hours)
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Standard Cost Per Unit
§ Standard cost per unit• Sum of the standard costs for direct materials, direct labor, and
manufacturing overhead
• Is determined for each product and often recorded on a standard cost
card which provides the basis for determining variances from standards
materials labour ManufacturingOverheads
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Variances from Standards
§ Variances from standards• Differences between total actual costs and total standard
costs• Unfavorable variances occur when too much is paid for
materials and labor or when there are inefficiencies inusing materials and labor
• Favorable variances occur when there are efficiencies inincurring costs and in using materials and labor
– A variance is not favorable if quality control standards aresacrificed
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Analyzing variances
§ Variances must be analyzed todetermine their significance
• First, determine the cost elements that comprise the
variance• For each manufacturing cost element, a total dollar
variance is computed. Then this variance is analyzedinto a price variance and a quantity variance
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Variance Relationships
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Formula for TotalMaterials Variance
Actual Quantityx Actual Price(AQ) x (AP)
Standard Quantityx Standard Price
(SQ) x (SP)
Total MaterialsVariance(TMV)
= _
§The total materials variance is computed fromthe following formula:
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Formula for MaterialsPrice Variance
Actual Quantityx Actual Price(AQ) x (AP)
Actual Quantityx Standard Price
(SQ) x (SP)
Materials PriceVariance(MPV)
= _
§The materials price variance is computedfrom the following formula:
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Formula for MaterialsQuantity Variance
Actual Quantityx Standard Price
(AQ) x (SP)
Standard Quantityx Standard Price
(SQ) x (SP)
MaterialsQuantityVariance
(MQV)
= _
§The materials quantity variance is determinedfrom the following formula:
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Matrix for DirectMaterials Variance
AQ X AP4200 X 3.10=13020
AQ XSP4200 X 3.00 =12,600
SQ XSP4000 X3= 12,000
1 - 2Price Variance13,020-12,600=Rs 420 UF
2 - 3Quantity Discount
12,600- 12,000=Rs 600 uf
1-3Total Variance13,020-12,000
=Rs 1020 UF
1 2 3
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Causes of Materials Variances
§ Materials variances may be caused by avariety of factors, including both internaland external factors
• Investigating materials price variances begins in the purchasing department, but the variance may be beyond thecontrol of purchasing (for ex., prices rise faster thanexpected)
• Investigating materials quantity variance begins in the
production department, but the variance may be beyond thecontrol of production (for ex., faulty machinery)
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Formula for TotalLabor Variance
Actual Hoursx Actual Rate(AH) x (AR)
Standard Hoursx Standard Rate
(SH) x (SR)
Total LaborVariance
(TLV)=
_
§The total labor variance is obtained from
the following formula:
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Formula for Labor Price Variance
Actual Hoursx Actual Rate(AH) x (AR)
Actual HoursX Standard Rate
(AH) x (SR)
Labor PriceVariance
(LPV)=
_
§The formula for the labor price variance isas follows:
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Formula forLabor Quantity Variance
Actual Hoursx Standard Rate
(AH) x (SR)
Standard Hoursx Standard Rate
(SH) x (SR)
LaborQuantityVariance
(LQV)
= _
§The labor quantity variance is derived fromthe following formula:
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Matrix for DirectMaterials Variance
AH X AR 2100 X 9.80=20580
AH XSR 2100 X 10 =21,000
SH XSR 2000 X10= 20,000
1 - 2Price Variance20,580-21,000
=Rs 420 F
2 - 3Quantity Variance
21,000- 20,000=Rs 1000 uf
1-3Total Variance20,580-20,000
=Rs 580UF
1 2 3
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Causes of Labor Variances
§ Labor variances may be caused by avariety of factors
• Labor price variances usually result from either paying
workers higher wages than expected or misallocatingworkers (for ex., using skilled workers in place of unskilledworkers)
• Labor quantity variances relate to the efficiency of workersand are usually related to the production department
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Actual Overhead Costs
§The total overhead variance is the differencebetween actual overhead costs and overhead
costs applied to work done.
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Formula for TotalOverhead Variance
ActualOverhead
OverheadApplied basedon Standard
Hours Allowed
TotalOverheadVariance
= _
§With standard costs, manufacturing overheadcosts are applied to work in process on the basis of the standard hours allowed for the work done. Standard hours allowed are the hours that should
have been worked for the units produced. Theformula for the total overhead variance is:
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Formula for OverheadControllable Variance
ActualOverhead
OverheadBudgeted based
on Standard
Hours Allowed
OverheadControllable
Variance
= _
§The formula for the OverheadControllable Variance is shown below:
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Formula forOverhead Volume Variance
FixedOverhead
Rate
Normal CapacityHours - Standard
Hours Allowed
OverheadVolume
Variance=X
§The Overhead Volume Variance indicates whether fixedcosts were efficiently used during the period. The formulafor computing the volume variance is as follows:
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Alternative Formula for OverheadVolume Variance
OverheadBudgeted based
on StandardHours Allowed
OverheadApplied basedon Standard
Hours Allowed
OverheadVolume
Variance=
_
§An alternative formula for computing thevolume variance is shown below:
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Causes of Manufacturing OverheadVariances
§ Manufacturing overhead variances may becaused by a variety of factors
• The controllable variance relates to variable manufacturingcosts and usually is the responsibility of the productiondepartment
• May result from either higher than expected use of indirect materials,indirect labor or supplies or increases in indirect manufacturing costs such asfuel
• The volume variance may be the responsibility of the
production department (inefficient use of direct labor hours) or may come from outside the productiondepartment (lack of sales orders)
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Reporting Variances
§ Reporting variances• All variances should be reported to appropriate levels of
management as soon as possible so that corrective actioncan be taken
• The form, content, and frequency of variance reports varyconsiderably among companies
• Variance reports facilitate the principle of “management by exception”
• In using variance reports, top management normallylooks for significant variances
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Let’s Review
The setting of standards is:
a. A managerial accounting decision.
d. Preferably set at the ideal level of performance
c. A worker decision.
b. A management decision
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