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Chapter 10Standard Costing:
A Managerial Control Tool
Chapter 10Standard Costing:
A Managerial Control Tool
COPYRIGHT © 2012 Nelson Education Ltd.
COPYRIGHT © 2012 Nelson Education Ltd.
Learning ObjectivesLearning Objectives
1. Explain how units standards are set and why standard cost systems are adopted
2. Explain 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 materials variances and explain how they are used for control
5. Compute the labour variances, and explain how they are used for control
6. (Appendix) Prepare journal entries for materials and labour variances
10-2
OBJECTIVE OBJECTIVE 11
Explain how unit standards are set and
why standard cost systems are adopted
COPYRIGHT © 2012 Nelson Education Ltd.
Unit StandardsUnit Standards
Developing standards enhances control
Need to determine the unit standard cost for a particular input
Two decisions:
Quantitydecision
Pricingdecision
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COPYRIGHT © 2012 Nelson Education Ltd.
Quantity & Price DecisionQuantity & Price Decision
The amount of input that should be used per unit of output
Quantity Standard
The amount that should be paid for the quantity of input to be used
Price Standard
Quantity Standard × Price Standard = Unit Standard10-5
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Unit Standard & Development of StandardsUnit Standard & Development of Standards
• Used to enhance cost control• Budgeted ‘unit’ costs
– Unlike budgets which contain aggregate amounts of total revenue and total costs
• Historical experience• Engineering studies• Input from operating personnel
Quantity Standards are developed by:
Unit Standard:
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Development of StandardsDevelopment of Standards
• Operations
• Purchasing
Price Standards are the joint responsibility of:
• Personnel
• Accounting
10-7
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Types of StandardsTypes of Standards
demand maximum efficiency and can be achieved only if everything operates perfectly
Ideal standards
can be achieved under efficiency operating conditions
Currently attainable standards
---
---
10-8
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Why Standard Cost Systems Are AdoptedWhy Standard Cost Systems Are Adopted
• To improve planning and control
• To facilitate product costing
Two reasons:
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Planning and ControlPlanning and Control
• Enhance planning and control• Improve performance management• Fundamental requirement for a
flexible budgeting system
Standards:
Actual costs are compared to budgeted costs and variances are computed
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COPYRIGHT © 2012 Nelson Education Ltd.
Product CostingProduct Costing
• Direct materials quantity
• Direct materials price
Costs are assigned to products using standards for:
• Direct labour quantity
• Direct labour price
• Overhead quantity
• Overhead price
10-11
COPYRIGHT © 2012 Nelson Education Ltd.
Standard CostingStandard Costing
• Greater capacity for control• Provides readily available unit cost
information• Simplifies cost assignments in both
process and job costing systems
Advantages:
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OBJECTIVE OBJECTIVE 22
Explain the purpose of a standard cost sheet
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 10-1Example: Cornerstone 10-1
• Assume that 100,000 packages of corn chips are produced during the first week of March
• Unit quantity standard is 18 grams of yellow corn per package
• Unit quantity standard for machine operators is 0.01 hour per package produced
Information:
HOW TO Compute Standard Quantities Allowed (SQ and SH)
• For the actual output of 100,000 packages:– How much yellow corn should have been used?– How many operator hours should have been used?
Required:
10-14
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Corn allowed:
=SQUnit
Quantity Standard
x Actual Output
18 x 100,000=
=
SQ
SQ 1,800,000 grams
Standard quantity of materials allowed
10-15
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Operator hours allowed:
=SHUnit
Quantity Standard
x Actual Output
0.01 x 100,000=
=
SH
SH 1,000 direct labour hours
Standard hours
allowed
10-16
OBJECTIVE OBJECTIVE 33
Describe the basic concepts underlying variance analysis, and explain when variances
should be investigated
COPYRIGHT © 2012 Nelson Education Ltd.
Variance Analysis ComponentsVariance Analysis Components
SP = Standard unit price of an input
SQ = Standard quantity of input for the actual output
AP = Actual price per unit of the input
AQ = Actual quantity of the input used
10-18
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Total Budget VarianceTotal Budget Variance
Total Variance
= Actual Cost
– Planned Cost
(AP x AQ) (SP x SQ)–
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Price (Rate) VariancePrice (Rate) Variance
Favourable variance = Actual price is less than standard price
-Actual Price
Standard Price
x Number of inputs used
Unfavourable variance = Actual price is greater than standard price
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COPYRIGHT © 2012 Nelson Education Ltd.
Usage (Efficiency) VarianceUsage (Efficiency) Variance
Favourable variance = Actual quantity is less than standard quantity
-Actual Quantity
Standard Quantity
x Standard Unit Price
Unfavourable variance = Actual quantity is greater than standard quantity
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The Decision to InvestigateThe Decision to Investigate
• Performance rarely meets established standards exactly
• Random variations around the standard are expected
• Management should determine an acceptable range of performance
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Example: Cornerstone 10-2Example: Cornerstone 10-2
Information: Standard cost: $100,000; allowable deviation: $10,000; actual costs for six months:
JuneJulyAugust
$97,500105,00095,000
$102,500SeptemberOctober 107,500November 112,500
Required: Plot the actual costs over time against the upper and lower control limits. Determine when a variance should be investigated
HOW TO Control Limits to Trigger a Variance Investigation
10-23
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ExampleExample
June July August
90,000
100,000
110,000
September October November
$120,000
Standard
Acceptable Range (Don’t
Investigate)
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
June July August
90,000
100,000
110,000
September October November
$120,000 Investigate
OBJECTIVE OBJECTIVE 44
Compute the materials variances, and explain how
they are used for control
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 10-3Example: Cornerstone 10-3
Unit standards:Standard price: $0.01 per gramStandard usage: 18 grams
Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 780,000 grams at $0.015
Information:
HOW TO Calculate the Total Variance for Materials
Required:Calculates the total variance for corn for the first week in March
10-27
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Total variance for corn:
Corn
Budgeted Costs
Actual Costs
Total Variance
AQ x AP
$11,700
– =
780,000 grams x $0.015
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COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Total variance for corn:
Budgeted Costs
Actual Costs
Total Variance
– =
Corn
SQ x SP
$11,700
(18 grams x 48,500 bags)
$8,730–
x $0.01
10-29
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Total variance for corn:
Budgeted Costs
Actual Costs
Total Variance
– =
Corn $11,700 $8,730 $2,970 U- =
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Direct Materials VariancesDirect Materials Variances
MPV = (AP AQ – SP) x
Materials Price Variance
Measures the difference between what should have been paid for raw materials
and what was actually paid
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COPYRIGHT © 2012 Nelson Education Ltd.
Direct Materials VariancesDirect Materials Variances
MUV = (AQ SP – SQ)
Materials Usage Variance
Measures the difference between the direct materials actually used and the direct materials that should have been
used for the actual output
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HOW TO Calculate Materials Variances: Formula and Columnar Approaches
Example: Cornerstone 10-4Example: Cornerstone 10-4
Unit standards:Standard price: $0.01 per gramStandard usage: 18 grams
Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 780,000 grams at $0.015
Information:
Required:Calculates the materials price and usage variance using the 3-pronged (columnar) and formula approaches
10-33
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
MPV
($0.015
$3,900 U
= (AP AQ – SP)
= – $0.01) 780,000MPV
=MPV
Materials Price Variance
Formula Approach
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COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
MUV
[780,000
$930 F
= (AQ SP – SQ)
= – (18 x 48,500)] ($0.01)MUV
=MUV
Materials Usage Variance
Formula Approach
10-35
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Columnar Approach
780,000 x $0.015
1. AQ x AP $11,700
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780,000 x $0.01
2. AQ x SP $7,800
(18 x 48,500) x $0.01
3. SQ x SP $8,730
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Columnar Approach
1. AQ x AP $11,700
2. AQ x SP $7,800
3. SQ x SP $8,730
Price Variance(1 – 2)
$3,900 U
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Usage Variance(2 – 3)$930 F
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Columnar Approach
1. AQ x AP $11,700
2. AQ x SP $7,800
3. SQ x SP $8,730
Price Variance(1 – 2)
$3,900 U
Usage Variance(2 – 3)$930 F
Total Variance(1 – 3)
$2,970 U10-38
COPYRIGHT © 2012 Nelson Education Ltd.
Responsibility for the Materials Price VarianceResponsibility for the Materials Price Variance
• Belongs to the purchasing agent• Price can be influenced by:
• Quality• Quantity discounts• Distance of the source from the plant
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Responsibility for the Materials Usage VarianceResponsibility for the Materials Usage Variance
• Belongs to the production manager• Variance can be influenced by minimizing:
• Scrap• Waste• Rework
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First step:
Decide whether the variance is significant
Analysis of the VariancesAnalysis of the Variances
Second step:
Find out why it occurred
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Materials variances are ADDED to cost of goods sold if they are
UNFAVOURABLE
Accounting and Disposition of Materials VariancesAccounting and Disposition of Materials Variances
Materials variances are SUBTRACTED from cost of goods
sold if FAVOURABLE
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Direct Labour VariancesDirect Labour Variances
LRV = (AR AH – SR) x
Labour Rate Variance
Computes the difference between what was paid to direct labourers and what
should have been paid
10-43
COPYRIGHT © 2012 Nelson Education Ltd.
Direct Labour VariancesDirect Labour Variances
LEV = (AH SR – SH)
Labour Efficiency Variance
Measures the difference between the labour hours that were actually used and the
labour hours that should have been used.
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OBJECTIVE OBJECTIVE 55
Compute the labour variances and explain how they are used for control
COPYRIGHT © 2012 Nelson Education Ltd.
Example: Cornerstone 10-5Example: Cornerstone 10-5
Unit standards:Standard price: $8.00 per hourStandard usage: 0.01 hours
Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 360 hours @ $8.35
Information:
HOW TO Calculate the Total Variance for Labour
Required:Calculate the total variance for inspection labour for the first week in March
10-46
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Total variance for inspection labour:
-Actual Costs
Budgeted Costs =
Total Variance
$3,006 - $3,880 = $874F
AQ x AP
Inspection labour
SQ x SP
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COPYRIGHT © 2012 Nelson Education Ltd.
How to Calculate Labour Variances: Formula and Columnar Approaches
Example: Cornerstone 10-6Example: Cornerstone 10-6
Unit standards:Standard price: $8.00 per hourStandard usage: 0.01 hours
Actual results for the first week in March:Actual production: 48,500 bags of corn chips Actual cost of corn: 360 hours @ $8.35
Information:
Required:Calculate the labour rate and efficiency variances using the 3-pronged (columnar) and formula approaches
10-48
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
LRV
($8.35
$126 U
= (AR AH
– SR)
= – $8.00) 360LRV
=LRV
Labour Rate Variance
Formula Approach
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COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
LEV
(360
= (AH SR – SH)
= – 485) $8.00LEV
Labour Efficiency Variance
Formula Approach
0.01 x 48,500$1,000 F=LEV
10-50
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Columnar Approach
360 x $8.35
1. AH x AR $3,006
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360 x $8.00
2. AH x SR $2,880
(0.01 x 48,500) x $8.00
3. SH x SR $3,880
COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Columnar Approach
1. AH x AR $3,006
2. AH x SR $2,880
3. SH x SR $3,880
Price Variance(1 – 2)$126 U
Usage Variance(2 – 3)
$1,000 F
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COPYRIGHT © 2012 Nelson Education Ltd.
ExampleExample
Columnar Approach
1. AH x AR $3,006
2. AH x SR $2,880
3. SH x SR $3,880
Price Variance(1 – 2)$126 U
Usage Variance(2 – 3)
$1,000 F
Total Variance(1 – 3)$874 F
10-53
COPYRIGHT © 2012 Nelson Education Ltd.
Causes of Labour Rate VarianceCauses of Labour Rate Variance
• Labour rates are determined by external forces as labour markets and union contracts
• Labour rates can vary when:– more skilled and more highly paid
labourers are used for less skilled tasks– unexpected overtime occurs
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Responsibility for the Labour Efficiency VarianceResponsibility for the Labour Efficiency Variance
• Production managers are responsible for the use of direct labour
• But once the cause is discovered, responsibility may be assigned elsewhere
10-55