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9 -1
Standard Standard Costing: A Costing: A Managerial Managerial Control ToolControl Tool
CHAPTERCHAPTER
9 -2
1. Tell how unit standards are set and why standard costing systems are adapted.
2. State the purpose of a standard cost sheet.3. Describe the basic concepts underlying
variance analysis, and explain when variances should be investigated.
4. Compute the material and labor variances, and explain how they are used for control.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
9 -3
5. Calculate the variable and fixed overhead variances, and give their definitions.
6. Appendix: Prepare journal entries for materials and labor variances, and show how to account for overhead variances.
ObjectivesObjectivesObjectivesObjectives
9 -4
Cost control often means the difference between
success and failure.
Cost control often means the difference between
success and failure.
9 -5
Why Standard Cost Systems Are Adopted
Standard costing systems enhance planning and control and improve performance measurement.
Standard costing systems facilitate product costing.
9 -6
Direct Direct
Materials Labor Overhead
Actual costing system Actual Actual Actual
Normal costing system Actual Actual Budgeted
Standard costing system Standard Standard Standard
Manufacturing Costs
9 -7
Standard Cost Sheet for Corn Chips
Standard Standard StandardPrice Usage Cost SubtotalDescription
Direct materials:Yellow corn $0.006 18 oz. $0.108Cooking oil 0.031 2 oz. 0.062Salt 0.005 1 oz. 0.005Lime 0.400 0.01 oz. 0.004Bags 0.044 1 bag. 0.044
Total direct materials $0.223
9 -8
Standard Cost Sheet for Corn Chips
Standard Standard StandardPrice Usage Cost SubtotalDescription
Direct materials $0.223Direct labor:
Inspectors $7.000 0.0070 hr. $0.049Machine operators 10.000 0.0008 hr. 0.008
Total direct labor 0.057Overhead:
Variable overhead 3.850 0.078 hr. $0.030Fixed overhead 32.050 0.0078 hr. 0.250
Total overhead 0.280Total standard unit cost $0.560
9 -9
During the first week of March, 100,000 packages of corn chips are produced.
During the first week of March, 100,000 packages of corn chips are produced.
The standard quantity of yellow corn meal per package is 18 ounces.
The standard quantity of yellow corn meal per package is 18 ounces.
9 -10
SQ = Unit quantity standard x Actual output
= 18 x 100,000
= 1,800,000 ounces
Standard Quantity of Materials Allowed
SH = Unit labor standard x Actual output
= 0.0008 x 100,000
= 80 direct labor hours
Standard Hours Allowed
9 -11
Total variance = Price variance + Usage variance
= (AP – SP)AQ + (AQ – SQ)SP
= [(AP x AQ) – (SP x AQ)]
+ [(SP x AQ) – (SP x SQ)]
= (AP x AQ) – (SP x AQ)]
+ (SP x AQ) – (SP x SQ)= (AP x AQ) – (SP x SQ)
9 -12 Variance Analysis: General Description
1. AP x AQ 1. AP x AQ (Actual Quantity (Actual Quantity of Input at Actual of Input at Actual Price)Price)
2. SP x AQ (Actual Quantity of Input at Standard Price)
3. SP x SQ 3. SP x SQ (Standard (Standard Quantity of Input Quantity of Input at Standard Price)at Standard Price)
Price Variance Price Variance (1-2)(1-2)
Budget Variance (1-3)
Usage Usage Variance (2-3)Variance (2-3)
9 -13
Favorable variances occur whenever the
opposite occurs.
Favorable variances occur whenever the
opposite occurs.
Unfavorable variances occur whenever actual
prices or usage of inputs are greater than standard
prices or usage.
Unfavorable variances occur whenever actual
prices or usage of inputs are greater than standard
prices or usage.
9 -14
Cost
Time
$110,000
$100,000
$ 90,000
x
x
x
x
x
x
9 -15
Variance Analysis: Materials and LaborVariance Analysis: Materials and LaborVariance Analysis: Materials and LaborVariance Analysis: Materials and Labor
Actual production 48,500 bags of corn chips
Actual cost of corn 780,000 ounces of $0.0069 = $5,382
Actual cost of inspection labor 360 hours at $7.35 = $2,646
Actual Costs Budgeted Costs Total VarianceActual Costs Budgeted Costs Total Variance
Corn $5,382.00 $5,238.00 $144.00 U
Inspection labor 2,646.00 2,376.50 269.50 U
9 -16
$558 F$558 FUsage Usage
VarianceVariance
$702 U$702 UPrice VariancePrice Variance
$144 U$144 UTotal VarianceTotal Variance
Variance Analysis: Columnar Approach
AQ x AP AQ x AP 780,000 x 0.0069 780,000 x 0.0069 $5,382$5,382
AQ x SPAQ x SP780,000 x $.0.0060780,000 x $.0.0060$4,680$4,680
SQ x SP873,000 x $0.0060$5,238
9 -17
MPV = (AP – SP)AQ
Material Price VarianceMaterial Price VarianceMaterial Price VarianceMaterial Price Variance
The actual The actual price per unitprice per unit
The standard The standard price per unitprice per unit
The actual The actual quantity of quantity of
material usedmaterial used
9 -18
MPV = (AP – SP)AQ
Material Price VarianceMaterial Price VarianceMaterial Price VarianceMaterial Price Variance
= ($0.0069 – $0.0060)780,000
= $0.0009 x 780,000
= $702 U
Percent of SP x SQ = $702/$4,680 = 15%Percent of SP x SQ = $702/$4,680 = 15%
9 -19
Direct Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage Variance
MUV = (AQ – SQ)SP
The actual The actual quantity of quantity of
materials usedmaterials used
The standard The standard quantity of quantity of materials materials
allowed for the allowed for the actual outputactual output
The standard The standard price per unitprice per unit
9 -20
MUV = (AQ – SQ)SP
Direct Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage Variance
= (780,000 – 873,000)($0.006)
= 93,000 x $0.006
= $558 F
Percent of SQ x SP = $558/$5,238 = 10.7%
9 -21
LRV = (AR – SR)AH
The actual hourly wage
rate
The standard hourly wage
rate
The actual direct labor hours used
Labor Rate VariancesLabor Rate Variances Labor Rate VariancesLabor Rate Variances
9 -22
Labor Rate VariancesLabor Rate Variances Labor Rate VariancesLabor Rate Variances
LRV = (AR – SR)AH = ($7.35 – $7.00)360
= $0.35 x 360
= $126 U
Percent of SR x SH = $126/$2,520 = 5%
9 -23
$269.50 U$269.50 UTotal VarianceTotal Variance
Labor Variances: Columnar Approach
AH x AR 360 x $735 $2,646
AH x SRAH x SR360 x $7.00360 x $7.00$2,520$2,520
SH x SRSH x SR339.5 x $7.00339.5 x $7.00$2,376.50$2,376.50
$126 U$126 URate VarianceRate Variance
$143.50 UEfficiency Variance
9 -24
LEV = (AH – SH) SR
The actual direct labor hours used
The standard direct labor hours that
should have been used
The standard hourly wage
rate
Labor Efficiency VariancesLabor Efficiency Variances Labor Efficiency VariancesLabor Efficiency Variances
9 -25
Labor Efficiency VariancesLabor Efficiency Variances Labor Efficiency VariancesLabor Efficiency Variances
LEV = (AH – SH)SR = (360 – 339.5)$7
= 20.5 x $7
= $143.50 U
Percent of SH x SR = $143.50/$2,376.50 = 6%
9 -26
Variable Overhead Variances
Variable overhead rate (standard) $3.85/DLH
Actual variable overhead costs $1,600 Actual hours worked 400
Bags of chips produced 48,500
Hours allowed for production 373.3
Applied variable overhead $1,456
9 -27
$144 U$144 UTotal VarianceTotal Variance
$84 U$84 UEfficiency VarianceEfficiency Variance
$60 U$60 USpending Spending VarianceVariance
Variable Overhead Variances: Columnar Approach
Actual Actual VOVO
$1,600$1,600
VO Rate x VO Rate x Actual HoursActual Hours
$1,540$1,540
VO Rate x Standard Hours
$1,456
9 -28
VOSV = (AVOR x AH) – (SVOR x AH)
Variable Overhead Variable Overhead Spending VariancesSpending Variances
Variable Overhead Variable Overhead Spending VariancesSpending Variances
= (AVOR – SVOR)AH
= ($4.00 – $3.85)400
= $60 U
9 -29
Crunch Chips, Inc.Crunch Chips, Inc.Flexible Budget Performance ReportFlexible Budget Performance ReportFor the Week Ended March 8, 2004For the Week Ended March 8, 2004
Cost Cost FormulaFormula
Actual Actual CostsCosts BudgetBudget
Spending Spending VarianceVariance
Gas $3.00 $1,190 $1,200 $10 F
Electricity 0.78 385 312 73 U
Water 0.07 25 28 3 F
Total cost $3.85 $1,600 $1,540 $60 U
9 -30
Crunch Chips, Inc.Performance Report
For the Week Ended March 8, 2004
Cost Cost FormulaFormula
Actual Actual CostsCosts BudgetBudget
Spending Spending VarianceVariance
Gas $3.00 $1,190 $1,200 $10 F
Electricity 0.78 385 312 73 U
Water 0.07 25 28 3 F
Total cost $3.85 $1,600 $1,540 $60 U
Budget Budget for for
Standard Standard HoursHours
EfficiencyEfficiencyVarianceVariance
$1,135 $65 U
295 17 U
26 2 U
$1,456 $84 U
9 -31
Fixed Overhead Variances
Budgeted fixed overhead $749,970
Practical activity 23,400 direct labor hours
Standard fixed overhead rate $32.05
Hours allowed to produce 3,000,000 bags of chips: 0.078 x 3,000,000 = $23,400
Budgeted or Planned Items
Actual Results
Actual production 2,750,000 bags of chips
Actual fixed overhead cost $749,000
Standard hours allowed for actual production 21,450
9 -32
Total Fixed Overhead Variances
Applied fixed overhead
Standard fixed overhead rate x Standard hours
=
= $32.05 x 21,450
= $687,473 (rounded)
Total fixed overhead variance
$749,000 – $687,473=
= $61,527 underapplied
9 -33
$61,527 U$61,527 UTotal VarianceTotal Variance
$970 F$970 FSpending Spending VarianceVariance
Fixed Overhead Variances: Columnar Approach
Actual FO$749,000
Budgeted FOBudgeted FO$749,970$749,970
Applied FOApplied FO$687,473$687,473
$62,497 UVolume Variance
9 -34
Crunch Chips, Inc.Performance Report
For the Year Ended 2004
Actual Actual CostsCosts
Budgeted Budgeted CostCost VarianceVariance
Depreciation $530,000 $530,000 $ ----
Salaries 159,370 159,970 600 F
Taxes 50,500 50,000 500 U
Insurance 9,130 10,000 870 F
Total fixed overhead $749,000 $749,970 $970 F
Fixed Fixed Overhead ItemsOverhead Items
9 -35
Volume Variance
Volume variance = $32.05(23,400 – 21,450)
= ($32.05 x 23,400) – ($32.05 x 21,450)
= $749,970 – $687,473
= Budgeted fixed overhead – Applied fixed overhead
= $62,497 U
9 -36
Appendix: Accounting for
Variances
9 -37
The actual price is $0.0069 per ounce of corn and standard price is $0.0060, and 780,000 ounces of corn are purchased.
The actual price is $0.0069 per ounce of corn and standard price is $0.0060, and 780,000 ounces of corn are purchased.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Materials Inventory 4 680 00
Materials Price Variance 702 00
Accounts Payable
5 382 00
Material Price VarianceMaterial Price VarianceMaterial Price VarianceMaterial Price Variance
9 -38
During the period 780,000 ounces of corn is placed into production. The
standard quantity is 873,000 ounces, and standard price is $0.006.
During the period 780,000 ounces of corn is placed into production. The
standard quantity is 873,000 ounces, and standard price is $0.006.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Work in Process 5 238 00
Materials Usage Variance 558 00
Materials Inventory 4 680 00
Material Usage VarianceMaterial Usage VarianceMaterial Usage VarianceMaterial Usage Variance
9 -39
During the period the firm has 360 actual inspection hours, while the standard hours for the units produced is 339.5 hours. The
actual rate is $7.35 per hour while the standard rate is $7.00 per hour.
During the period the firm has 360 actual inspection hours, while the standard hours for the units produced is 339.5 hours. The
actual rate is $7.35 per hour while the standard rate is $7.00 per hour.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Work in Process 2 376 00
Labor Efficiency Variance 143 50
Labor Rate Variance 126 00
Accrued Payroll
2 646 00
Labor VariancesLabor VariancesLabor VariancesLabor Variances
9 -40
At the end of the year, the variances for materials and labor are usually closed to
Cost of Goods Sold.
At the end of the year, the variances for materials and labor are usually closed to
Cost of Goods Sold.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Cost of Goods Sold 971 50
Material Price Variance 702 00
Labor Efficiency Variance 143 50
Labor Rate Variance 126 00
Closing VariancesClosing VariancesClosing VariancesClosing Variances
9 -41
At the end of the year, the variances for materials and labor are usually closed to
Cost of Goods Sold.
At the end of the year, the variances for materials and labor are usually closed to
Cost of Goods Sold.
The receiving report and the invoice are used to record the receipt of the
merchandise and to control the payment.
Material Usage Variance 558 00
Cost of Goods Sold 558 00
Closing VariancesClosing VariancesClosing VariancesClosing Variances
9 -42
The EndThe EndThe EndThe End
Chapter NineChapter Nine
9 -43
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