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HANSEN & MOWENHANSEN & MOWEN

Cost ManagementCost ManagementACCOUNTING AND CONTROLACCOUNTING AND CONTROL

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Standard Costing: A Functional-Based Standard Costing: A Functional-Based Control ApproachControl Approach

9

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Developing Unit Input StandardsDeveloping Unit Input Standards 1

Unit standard cost is the product of these two standards:

Standard price Standard Quantity (SP SP)

Quantity standards specify how much of the input should be used per unit of output.

Price standards specify how much should be paid for the quantity of the input to be used.

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Ideal standards demand maximum efficiency and can be achieved only if everything operates perfectly.

Currently attainable standards can be achieved under efficient operating conditions.

Kaizen standards reflect a planned improvement and are a type of currently attainable standard.

Developing Unit Input StandardsDeveloping Unit Input Standards 1

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Developing Unit Input StandardsDeveloping Unit Input Standards 1

Usage of Standard Costing Systems

Cost Management

Planning and Control

Decision Making and Product Costing

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Developing Unit Input StandardsDeveloping Unit Input Standards 1

Cost Assignment ApproachesCost Assignment ApproachesCost Assignment ApproachesCost Assignment Approaches

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2Standard Cost SheetsStandard Cost Sheets

Standard Cost Sheet for Deluxe Strawberry Standard Cost Sheet for Deluxe Strawberry Frozen YogurtFrozen Yogurt

Standard Cost Sheet for Deluxe Strawberry Standard Cost Sheet for Deluxe Strawberry Frozen YogurtFrozen Yogurt

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Total budget variance = (AP AQ) – (SP SQ)

Performance Report: Total Budget VariancesPerformance Report: Total Budget VariancesPerformance Report: Total Budget VariancesPerformance Report: Total Budget Variances

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Price and Usage Variances: Direct MaterialsPrice and Usage Variances: Direct MaterialsPrice and Usage Variances: Direct MaterialsPrice and Usage Variances: Direct Materials

MPV = (AP – SP)AQ MUV = (AQ– SQ)SP

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Materials (SP AQ) 15,600 Direct Materials Price Variance (AP - SP)AQ 3,900

Accounts Payable (AP AQ) 19,500

Work in Process (SQ SP) 15,600 Direct Materials Usage Variance (AQ - SQ)SP 3,900

Materials (AQ SP) 19,500

Accounting for the Direct Materials Price and Usage Variances

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Direct materials price variances can be computed at the point

1)when the direct materials are issued into production OR

2)when the materials are purchased. (This method would require AQ to be defined as the actual quantity purchased, rather than actual quantity used.

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Direct materials usage variances should be computed as direct materials are issued into production.

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Rate and Efficiency Variances: Direct LaborRate and Efficiency Variances: Direct LaborRate and Efficiency Variances: Direct LaborRate and Efficiency Variances: Direct Labor

LRV = (AR – SR)AH LRV = (AR – SR)AH

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Accounting for the Direct Labor Rate and Efficiency Variances

Work in Process (SH SR) 2,400 Direct Labor Rate Variance (AR - SR)AH 65 Direct Labor Efficiency Variance (AH - SH)SR 200

Wages Payable (AH AR) 2,665

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Investigating Direct Materials and Labor Variances:

Because random variations around the standard are expected, management should establish an acceptable range of performance.

The acceptable range is the standard, plus or minus an allowable deviation. The upper control limit is the standard plus the allowable deviation, and the lower control limit is the standard minus the allowable deviation.

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Cost of Goods Sold 4,765 Direct Materials Price Variance 3,900 Direct Materials Usage Variance 600 Direct Labor Rate Variance 65 Direct Labor Efficiency Variance 200

Disposition of Direct Materials and Direct Labor Variances - Immaterial

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3Variance Analysis and Accounting:Variance Analysis and Accounting:Direct Materials and Direct LaborDirect Materials and Direct Labor

Finished Goods 953 Cost of Goods Sold 3,812

Direct Materials Price Variance 3,900 Direct Materials Usage Variance 600 Direct Labor Rate Variance 65 Direct Labor Efficiency Variance 200

Disposition of Direct Materials and Direct Labor Variances - Material

Prime Costs Percentage of Total

Work in Process $0 0%Finished Goods 3,480 20Cost of Goods Sold 13,920 80

Total $17,400 100%

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4

Variable Overhead AnalysisVariable Overhead AnalysisVariable Overhead AnalysisVariable Overhead Analysis

VOHSP= (AVOR – SVOR)AH VOHEV = (AH – SH)SVOR

Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

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4Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

Variable Overhead Spending Variance by ItemVariable Overhead Spending Variance by ItemVariable Overhead Spending Variance by ItemVariable Overhead Spending Variance by Item

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4Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

Variable Overhead Spending and Variable Overhead Spending and Efficiency Variance by ItemEfficiency Variance by ItemVariable Overhead Spending and Variable Overhead Spending and Efficiency Variance by ItemEfficiency Variance by Item

aPer direct labor hour.

bSpending variance = Actual costs - Budget for actual hours.

cEfficiency variance = Budget for actual hours - Budget for standard hours.

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4

Fixed Overhead AnalysisFixed Overhead AnalysisFixed Overhead AnalysisFixed Overhead Analysis

FOHSP= AFOH – BFOH FOHVV = SFOHR [SH(D) – SH]

Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

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4Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

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4Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

Graph of Fixed Overhead VariancesGraph of Fixed Overhead VariancesGraph of Fixed Overhead VariancesGraph of Fixed Overhead Variances

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4

Accounting for Overhead Variances

Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

To recognize the incurrence of actual overhead:Variable Overhead Control 7,540 Fixed Overhead Control 20,500

Miscellaneous Accounts 28,040

To recognize the variances:Fixed Overhead Control 3,500 Variable Overhead Efficiency Variance 600 Fixed Overhead Spending Variance 500

Variable Overhead Control 340 Variable Overhead Spending Variance 260 Fixed Overhead Volume Variance 4,000

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4

Accounting for Overhead Variances (continued)

Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

To close the variances to Cost of Goods Sold:Fixed Overhead Volume Variance 4,000 Variable Overhead Spending Variance 260

Cost of Goods Sold 4,260

Cost of Goods Sold 1,100 Variable Overhead Efficiency Variance 600 Fixed Overhead Spending Variance 500

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4

Two-Variance Analysis: Helado CompanyTwo-Variance Analysis: Helado CompanyTwo-Variance Analysis: Helado CompanyTwo-Variance Analysis: Helado Company

Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

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4

Three-Variance Analysis: Helado CompanyThree-Variance Analysis: Helado CompanyThree-Variance Analysis: Helado CompanyThree-Variance Analysis: Helado Company

Variance Analysis: Overhead CostsVariance Analysis: Overhead Costs

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Standard Mix Information: Direct Materials

Direct Material Mix Mix Proportion SP Standard Cost

Peanuts 128 lbs. 0.80 $0.50$64

Almonds 32 lbs. 0.20 1.00 32

Total 160 lbs.$96

Yield 120 lbs.

Yield ratio: 0.75 (1.20/160)

Standard cost of yield (SP): $0.80 per pound ($96/120 pounds of yield)

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

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Malcom Nut Company produces a batch of 1,600 pounds and produces the following actual results:

Direct Material Actual Mix Percentages

Peanuts 1,120 lbs. 70 %Almonds 480 30Total 1,600 lbs. 100 %

Yield 1,300 lbs. 81.3 %

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

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Mix Variance = Σ(AQi – SMi)SPi

Direct Material AQ SM AQ – SM SP (AQ – SM)SP

Peanuts 1,120 1,280 -160 $0.50 $-80Almonds 480 320 160 1.00 60Mix variance $-80 U

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

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Standard yield = Yield ratio x Total actual inputs

Yield variance = (Standard yield – Actual yield) SPy

Yield variance = (1,200 – 1,300)$0.80

= $80 F

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

Direct Materials Yield Variance

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Labor Type Mix Mix Proportion SP Standard Cost

Shelling 3 hrs. 0.60 $ 8.00 $24

Mixing 2 hrs. 0.40 15.00 30

Total 5 hrs. $54

Yield 120 lbs.

Yield ratio: 24 = (120/5), or 2,400%

Standard cost of yield (SPy ): $0.45 per pound ($54/120 pounds of yield)

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

Standard Mix Information

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Shelling 20 hrs. 40%

Mixing 30 hrs. 60%

Total 50 hrs. 100%

Yield 1,300 lbs. 2,600%

*Uses 50 hours as the base.

Direct Labor Type Actual Mix Percentages*

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

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Direct Labor Type AH SM AH – SM SP (AH – SM)/SP

Shelling 20 30 -10 $ 8.00 $-80

Mixing 30 20 10 15.00 150

Direct Labor mix variance $-70 U

Mix and Yield Variances:Mix and Yield Variances:Materials and LaborMaterials and Labor 5

Direct Labor Mix Variance

Direct Labor Yield Variance

Yield variance = (Standard yield – Actual yield)SPy= [(24 x 50) – 1,300]$0.45= (1,200 – 1,300)$0.45= $45 F

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End of End of Chapter 9Chapter 9