View
221
Download
5
Category
Preview:
Citation preview
Standard Costs and
Operating Performance
Measures
Chapter 10
Total Price/Cost VarianceActual Activity x( Actual Price/Cost- Planned Price/Cost)
Note: Price/cost is per unit of activity
Total Activity VariancePlanned Price/Cost(Actual activity – Planned Activity)
Note: Planned Price/Cost is per unit of activity
Actual Activity Actual Activity Planned Activity× × ×
Actual Price/Cost Planned Price/cost Planned Price/cost
Overview: A General Model for Actual Results Variance Analysis
Master/Static BudgetActual Results Flexible Budget
Standard Costs per unit of
ActivityStandards are benchmarks or “norms” for
measuring performance. In managerial accounting,
two types of standards are commonly used.
Quantity standards
specify how much of an
input should be used to
make a product or
provide a service.
Price standards
specify how much
should be paid for
each unit of the
input.
Examples: Proctor & Gamble, General Mills, Ford, Chipolte, McDonald’s,
hospitals, construction and manufacturing companies.
Standard Costs
DirectMaterial
Deviations from standards deemed significant
are brought to the attention of management, a
practice known as management by exception.
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
Standard
Overview: Actual Results Cost Variance Analysis
Actual Activity Actual Activity
× ×Actual Cost Planned Cost
Actual Results Flexible Budget
Total Cost VarianceTotal Actual Activity x( Actual cost/unit – Planned cost/unit)
Note: Cost is per unit of activity
Cost/Rate Variance Usage/Activity Variance
Actual Qty/unit Actual Qty/unit Standard Qty/unit× × ×
Actual cost/rate Standard cost/rate Standard cost/rate
Divider FlexibleActual Results
Actual Activity Actual Activity Actual Activity
Variance Analysis Cycle
Prepare standard
cost performance
report
Analyze
variances
Begin
Identify
questions
Receive
explanations
Take
corrective
actions
Conduct next
period’s
operations
Setting Standard CostsAccountants, engineers, purchasing
agents, and production managers
combine efforts to set standards that encourage
efficient future operations.
Setting Standard Costs
Engineer
Should we use
ideal standards that
require employees to
work at 100 percent
peak efficiency?
Managerial Accountant
I recommend using practical
standards that are currently
attainable with reasonable
and efficient effort.
How direct materials
standards and direct labor
standards are set.
Setting Direct Material
Standards
Price
Standards
Summarized in
a Bill of Materials.
Final, delivered
cost of materials,
net of discounts.
Quantity
Standards
Setting Direct Labor
Standards
Rate
Standards
Often a single
rate is used that reflects
the mix of wages earned.
Time
Standards
Use time and
motion studies for
each labor operation.
Setting Variable
Manufacturing Overhead
Standards Rate
Standards
The rate is the
variable portion of the
predetermined overhead
rate.
Quantity
Standards
The quantity is
the activity in the
allocation base for
predetermined overhead.
Standard Cost Card –Variable Production Cost
A standard cost card for one unit of
product might look like this:
A A x B
Standard Standard Standard
Quantity Price Cost
Inputs or Hours or Rate per Unit
Direct materials 3.0 lbs. 4.00$ per lb. 12.00$
Direct labor 2.5 hours 14.00 per hour 35.00
Variable mfg. overhead 2.5 hours 3.00 per hour 7.50
Total standard unit cost 54.50$
B
Price and Quantity Standards
Price and quantity standards are
determined separately for two reasons:
The purchasing manager is responsible for raw
material purchase prices and the production manager
is responsible for the quantity of raw material used.
The buying and using activities occur at different times.
Raw material purchases may be held in inventory for a
period of time before being used in production.
A General Model for Variance Analysis
Variance Analysis
Price Variance
Difference between
actual price and
standard price
Quantity Variance
Difference between
actual quantity and
standard quantity
Variance Analysis
•Materials price variance
•Labor rate variance
•VOH rate variance
•Materials quantity variance
•Labor efficiency variance
•VOH efficiency variance
A General Model for Variance Analysis
Cost(price/rate)
Variance
Quantity/activity
Variance
Cost(Price)
Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Cost Standard Cost Standard Cost
A General Model for Variance Analysis
Cost(price)
Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantityx × ×
Actual Cost Standard Cost Standard Price
A General Model for Variance Analysis
Actual quantity is the amount of direct
materials, direct labor, and variable
manufacturing overhead actually used.
Cost(price)
Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Cost Standard Cost Standard Cost
A General Model for Variance Analysis
Standard quantity is the standard quantity
allowed for the actual output of the period.
Cost(price)
Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Cost Standard Cost Standard Cost
A General Model for Variance Analysis
Actual Cost(price) is the amount actually
paid for the input used.
A General Model for Variance Analysis
Standard price is the amount that should
have been paid for the input used.
Cost(price)
Variance
Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Cost Standard Cost Standard Cost
A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Rate/Price Variance Usage/Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
PV = AQ (AP - SP) QV = SP (AQ - SQ)
Compute the direct
materials price and
quantity variances and
explain their significance.
Material Variances – An Example
Glacier Peak Outfitters has the following direct
material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 210 kgs. of fiberfill were purchased and
used to make 2,000 parkas. The material cost a
total of $1,029 @ $4.90/kgs
210 kgs. 210 kgs. 200 kgs.
× × ×$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
Material Variances Summary
210 kgs. 210 kgs. 200 kgs.
× × ×$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
$1,029 210 kgs
= $4.90 per kg
Material Variances Summary
210 kgs. 210 kgs. 200 kgs.
× × ×$4.90 per kg. $5.00 per kg. $5.00 per kg.
= $1,029 = $1,050 = $1,000
Price variance
$21 favorable
Quantity variance
$50 unfavorable
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
0.1 kg per parka 2,000 parkas
= 200 kgs
Material Variances Summary
Material Variances:Using the Factored Equations
Materials price variance
MPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity variance
MQV = SP (AQ - SQ)
= $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas))
= $5.00/kg (210 kgs - 200 kgs)
= $5.00/kg (10 kgs)
= $50 U
Isolation of Material Variances
I need the price variancesooner so that I can better
identify purchasing problems.
You accountants just don’tunderstand the problems thatpurchasing managers have.
I’ll start computing
the price variance
when material is
purchased rather
than when it’s used.
Material Variances
A Business purchased and used 1,700 pounds. How are the variances
computed if the amount purchased differs from
the amount used?
The price variance is computed on the entire
quantity purchased.
The quantity variance is computed only on
the quantity used.
Materials Price VarianceMaterials Quantity Variance
Production Manager Purchasing Manager
The standard price is used to compute the quantity variance
so that the production manager is not held responsible for
the purchasing manager’s performance.
Responsibility for Material Variances
I am not responsible forthis unfavorable material
quantity variance.
You purchased cheapmaterial, so my peoplehad to use more of it.
Your poor scheduling sometimes requires me to
rush order material at a higher price, causing
unfavorable price variances.
Responsibility for Material Variances
Material Variances – An Example
Glacier Peak Outfitters has the following direct
material standard for the fiberfill in its mountain
parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month 300 kg. of fiberfill were purchased at
$1,470. 210kg was used to make 2,000 parkas.
Actual Quantity Actual QuantityPurchased Purchased× ×
Actual Price Standard Price
300kg. 300kg.
× ×$4.90 per kg. $5.00 per kg.
= $1,470 = $1,500
Price variance
$30 favorable
Price variance increases
because quantity
purchased increases.
Quick Check Continued
Actual QuantityUsed Standard Quantity × ×
Standard Price Standard Price
210 kg. 200 kg.
× ×$5.00 per kg. $5.00 per kg.
= $1,050 = $1,000
Quantity variance
$50 unfavorable
Quantity variance is
unchanged because
actual and standard
quantities are unchanged.
Quick Check Continued
Compute the direct labor
rate and efficiency
variances and explain
their significance.
Labor Variances – An Example
Glacier Peak Outfitters has the following direct labor
standard for its mountain parka.
$12 standard cost per parka, for 1900 parkas
Last month, employees actually worked 2,500 hours
at a total labor cost of $13.125 to make 2,000
parkas.
Rate variance
$2,250 unfavorable
Usage variance
$1200 unfavorable
Actual Units Actual Units Standard Units × × ×
Actual Rate Standard Rate Standard Rate
Labor Variances Summary
2,000 parkas 2,000 parkas 1,900 parkas
× × ×$13.125 per Parka $12.00 per Parka $12.00 per Parka
= $26,250 = $24,000 = $22,800
Labor Variances – An Example
Glacier Peak Outfitters has the following direct labor
standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour =
$12/parka
Last month, employees actually worked 2,500 hours
at a total labor cost of $26,250 to make 2,000
parkas.
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
$26,250 2,500 hours
= $10.50 per hour
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Labor Variances Summary
2,500 hours 2,500 hours 2,400 hours
× × ×$10.50 per hour $10.00 per hour. $10.00 per hour
= $26,250 = $25,000 = $24,000
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
1.2 hours per parka 2,000
parkas = 2,400 hours
Rate variance
$1,250 unfavorable
Efficiency variance
$1,000 unfavorable
Labor Variances:Using the Factored Equations
Labor rate variance
LRV = AH (AR - SR)
= 2,500 hours ($10.50 per hour – $10.00 per hour)
= 2,500 hours ($0.50 per hour)
= $1,250 unfavorable
Labor efficiency variance
LEV = SR (AH - SH)
= $10.00 per hour (2,500 hours – 2,400 hours)
= $10.00 per hour (100 hours)
= $1,000 unfavorable
Responsibility for Labor
Variances
Production managers
are usually held
accountable
for labor variances
because they can
influence the:
Mix of skill levels
assigned to work tasks.
Level of employee
motivation.
Quality of production
supervision.
Quality of training
provided to employees.
I am not responsible forthe unfavorable laborefficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
I think it took more time to process the
materials because the Maintenance
Department has poorly maintained your
equipment.
Responsibility for Labor
Variances
Compute the variable
manufacturing overhead
rate and efficiency
variances.
A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Rate/Price Variance Usage/Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
PV = AQ (AP - SP) QV = SP (AQ - SQ)
Variable Manufacturing Overhead Variances – An
ExampleGlacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for its mountain
parka.
1.2 standard hours per parka at $4.00 per hour
Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for
the month was $10,500.
2,500 hours 2,500 hours 2,400 hours
× × ×$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
Variable Manufacturing Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
$10,500 2,500 hours
= $4.20 per hour
Variable Manufacturing Overhead Variances
Summary
Actual Hours Actual Hours Standard Hours× × ×
Actual Rate Standard Rate Standard Rate
2,500 hours 2,500 hours 2,400 hours
× × ×$4.20 per hour $4.00 per hour $4.00 per hour
= $10,500 = $10,000 = $9,600
Rate variance
$500 unfavorable
Efficiency variance
$400 unfavorable
1.2 hours per parka 2,000
parkas = 2,400 hours
Variable Manufacturing Overhead Variances
Summary
Variable Manufacturing Overhead Variances: Using
Factored EquationsVariable manufacturing overhead rate variance
VMRV = AH (AR - SR)
= 2,500 hours ($4.20 per hour – $4.00 per hour)
= 2,500 hours ($0.20 per hour)
= $500 unfavorable
Variable manufacturing overhead efficiency variance
VMEV = SR (AH - SH)
= $4.00 per hour (2,500 hours – 2,400 hours)
= $4.00 per hour (100 hours)
= $400 unfavorable
A General Model for Variance Analysis
(AQ × AP) – (AQ × SP) (AQ × SP) – (SQ × SP)
AQ = Actual Quantity SP = Standard Price
AP = Actual Price SQ = Standard Quantity
Rate/Price Variance Usage/Quantity Variance
Actual Quantity Actual Quantity Standard Quantity× × ×
Actual Price Standard Price Standard Price
PV = AQ (AP - SP) QV = SP (AQ - SQ)
Demonstration Case 3
Usage and Cost Variances
Variable Costs Per
Unit
Standard Actual
Direct Materials Cost $16.00 $16.34
Direct Labor Cost 12.00 10.92
Overhead Cost 14.00 14.20
Total $42.00 41.46
Expected Fixed Cost
Manufacturing $120,400 $114,000
# of Units 43,000 44,000
Demonstration Case
Material Usage and Cost Variances
Variable Costs Per
Unit
Standard Actual
Direct Materials Cost $16.00 $16.34
# board Feet/unit 8 ft 8.6 ft
Cost per bd foot $2 $1.90
Material Flexible-Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
ActualResults
16.34 x 44,000$(718,960)
FlexibleBudget
16.00 x 44,000$(704,000)
$14,960 Unfavorable
Material Cost and
Volume Variances
Actual Quantity
Used
×Actual (fixed) Cost
Actual Quantity
Used
×Standard (fixed) Cost
Standard
Quantity
×Standard (fixed) Cost
44,000
×8.6 ft
x
$1.90
$718,960
44,000
x
8.6 ft
x
$2/ ft
756,800
Cost Variance
$37,960 Favorable
44,000
x
8 ft
x
$2/ft
$704,000
Volume Variance
$52,800 Unfavorable
Total Variance
$14,960 UnFavorable
Actual Cost
Column
Variance Dividing
Column
Flexible Standard Cost
Column
Demonstration Case
Labor Usage and Cost
Variances
Variable Costs Per
Unit
Standard Actual
Direct Labor Cost $12.00 $10.92
# hours /unit 1.5 hr 1.4 hrs
Labor cost/hr $8.00 $7.80
Labor Flexible-Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
ActualResults
10.92 x 44,000$(480,480)
FlexibleBudget
12.00 x 44,000$(528,000)
$47,520 Favorable
Labor Cost and
Volume Variances
Actual Quantity
Used
×Actual (fixed) Cost
Actual Quantity
Used
×Standard (fixed) Cost
Standard
Quantity
×Standard (fixed) Cost
×1.4 hr
x
$7.80
$480,480
44,000 44,000
x
1.4 hr
x
$ 8.00
492,800
Cost Variance
$12,320 Favorable
44,000
x
1.5 hr
x
$ 8.00
$528,000
Volume Variance
$35,200 Favorable
Total Variance
$47,520 Favorable
Actual Cost
Column
Variance Dividing
Column
Flexible Standard Cost
Column
Demonstration Case
Variable MFG Overhead Usage and
Cost Variances
Variable Costs Per
Unit
Standard Actual
Overhead Cost $14.00 $14.20
Variable MFG Overhead Flexible-Budget
Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
ActualResults
14.20 x 44,000$(624,000)
FlexibleBudget
14.00 x 44,000$(616,000)
$8,800 Unfavorable
Demonstration Case
Summary of Usage and Cost Variances
Variable Costs Per
Unit
Standard Actual Variance
Direct Materials Cost $16.00 $16.34 $14, 960 UF
Direct Labor Cost 12.00 10.92 $ 47,520 F
Overhead Cost 14.00 14.20 $ 8,800 UF
Total $42.00 41.46 $ 23,760 F
Expected Fixed Cost
Manufacturing $120,400 $114,000 $ 6,400 F
# of Units 43,000 44,000
Demonstration Case
Fixed Overhead Volume and
SpendingVariances
Variable Costs Per
Unit
Standard Actual
OVH Cost $120,400 $114,000
Cost/unit 2.80 2.59 (114,000/44,000=2.59)
Total Units 43,000 44,000
Fixed Overhead Flexible-
Budget Variances
Total flexible-budget variance
= Total actual results
– Total flexible-budget planned results
Flexible-budget variances
ActualResults
2.59 x 44,000$(114,000) rnd
MasterBudget
2.80 x 43,000$(120,400)
$6,400 Favorable
Fixed Overhead Spending and
Volume Variances
Actual Quantity
Used
×Actual (fixed) Cost
Standard Quantity
Used
×Standard (fixed) Cost
Actual
Quantity
×Standard (fixed) Cost
44,000
×2.59
114,000
43,000
x
2.80
120,400
Spending Variance
$6,400 Favorable
44,000
x
2.80
$123,200
Volume Variance
$2,800 Favorable
Actual Cost
Column
Master Budget Dividing
Column
Flexible Standard Cost
Column
Total Variance
$9,200 Favorable
Variance Analysis and Management by Exception
How do I know
which variances to
investigate?
Larger variances, in dollar amount or as a percentage of the
standard, are investigated first.
A Statistical Control Chart
1 2 3 4 5 6 7 8 9
Variance Measurements
Favorable Limit
Unfavorable Limit
••
•• •
••
••
Warning signals for investigation
Desired Value
Advantages of Standard
Costs
Management by
exception
Advantages
Promotes economy
and efficiency
Simplified
bookkeeping
Enhances
responsibility
accounting
Potential
Problems
Emphasis onnegative may
impact morale.
Emphasizing standardsmay exclude other
important objectives.
Favorablevariances may
be misinterpreted.
Continuousimprovement maybe more important
than meeting standards.
Standard costreports may
not be timely.
Invalid assumptionsabout the relationship
between laborcost and output.
Potential Problems with
Standard Costs
Compute delivery cycle
time, throughput time, and
manufacturing cycle
efficiency (MCE).
Process time is the only value-added time.
Delivery Performance
Measures
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
ProductionStarted
Goods Shipped
Throughput Time
Manufacturing
Cycle
Efficiency
Value-added time
Manufacturing cycle time=
Wait TimeProcess Time + Inspection Time
+ Move Time + Queue Time
Delivery Cycle Time
Order Received
ProductionStarted
Goods Shipped
Throughput(Manufacturing Cycle) Time
Delivery Performance Measures
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the throughput time?
a. 10.4 days.
b. 0.2 days.
c. 4.1 days.
d. 13.4 days.
Throughput time = Process + Inspection + Move + Queue
= 0.2 days + 0.4 days + 0.5 days + 9.3 days
= 10.4 days
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the Manufacturing Cycle Efficiency (MCE)?
a. 50.0%.
b. 1.9%.
c. 52.0%.
d. 5.1%.
MCE = Value-added time ÷ Throughput time
= Process time ÷ Throughput time
= 0.2 days÷ 10.4 days
= 1.9%
Quick Check
A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.
Quick Check A TQM team at Narton Corp has recorded the following
average times for production:
Wait 3.0 days Move 0.5 days
Inspection 0.4 days Queue 9.3 days
Process 0.2 days
What is the delivery cycle time (DCT)?
a. 0.5 days.
b. 0.7 days.
c. 13.4 days.
d. 10.4 days.DCT = Wait time + Throughput time
= 3.0 days + 10.4 days
= 13.4 days
Assignments:
See web: http//cabrillo.edu/~mbooth
This will be updated weekly
Note: Use McGrawHill CONNECT manager to submit assignments
Recommended