04/19/23 A&MIS 212 1

Introduction to Accounting

Standard Costing

Session 31February 21,2002

04/19/23 A&MIS 212 2

Agenda for Today

Discuss problems assigned and other practice problems

Outline approaches to future problems.

04/19/23 A&MIS 212 3

Unit cost standards

Specification of unit cost standards:

Direct material sp × sq

Direct labor sr × sh

Variable OH sr × sq

Fixed OH sr × sq

Total unit std. cost

04/19/23 A&MIS 212 4

Unit costs incurred

Characterization of actual costs:

Direct material ap × aq

Direct labor ar × ah

Variable OH ar × aq

Fixed OH ar × aq

Total cost incurred per unit

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Other terminology

Total quantities:

AQ represents total actual quantity

AQU represents the total quantity actually used or produced.

AQP represents the total quantity purchased

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A budget view of variances

Flexible Flexible

Budget Budget

Actual (AQ input) (SQ input)

Cost sp × AQ sp × SQ

incurred

Actual cost - sp × AQ sp × AQ - sp × SQ

04/19/23 A&MIS 212 7

A Formula View of Variances

Total variance = actual – standard cost

Total variance = ap × AQ – sp × SQ

Price variance = (ap – sp) × AQ

Quantity variance = sp(AQ – SQ)

04/19/23 A&MIS 212 8

Algebra of Variances

Price variance + quantity variance

= total variance

= [(ap – sp) × AQ] + [sp × (AQ – SQ)]

= ap × AQ – sp × AQ + sp × AQ – sp × SQ

= [ap × AQ] – [sp × SQ], the total variance

04/19/23 A&MIS 212 9

Exercise 10-1: Material sp

Cost per 15-gal. Container $115.00

Less 2% discount 2.30

Net cash cost $112.70

Add freight cost ($130/100) 1.30

Total cost per container $114.00

Divide by quarts per container* 60.00

Standard cost per quart $ 1.90*15 gallons 4 quarts per gallon = 60 quarts

04/19/23 A&MIS 212 10

Exercise 10-1: Material sq

Content per bill of materials 7.6 qts.

Allowance for evaporation and

spoilage (7.6 qts./0.95 = 8 qts.) 0.4

Total quantity per bottle 8.0 qts.

Allowance for rejected bottles

(8.0 qts./40 saleable bottles) 0.2

Standard quantity per bottle 8.2 qts.

04/19/23 A&MIS 212 11

Standard Cost of Materials

Standard Standard Std. Cost

Item Quantity Price Per Bottle

Echol 8.2 qts. $1.90/qt. $15.58

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E10-3: Quantities

• AQ (DM) = 20,000 lbs.• AQ (output) = 4,000 units• SQ (DM) = 4,000 units 4.6 lbs./unit

= 18,400 lbs.• SQ (DL) = 4,000 units 0.2 hrs.*/unit

= 800 labor hours

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E10-3: Formula Method - DM

Materials price variance = AQ (ap – sp)

MPV = 20,000 lbs. ($2.35 – $2.50 per lb.)

= - $3,000 F

Materials quantity variance = sp (AQ – SQ)

MQV = $2.50/lb. (20,000 lbs. – 18,400 lbs.)

= $4,000 U

Total variance = - $3,000 + $4,000 = $1,000 U

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E10-3: Flexible Budget Method

Flexible Flexible

Budget Budget

Actual (AQ input) (SQ input)

Cost incurred sp × AQ sp × SQ

20,000 lbs. 20,000 lbs. 18,400 lbs.

@ $2.35 = @ $2.50 = @ $2.50 =

$47,000 $50,000 $46,000

-$3,000 F $4,000 U

Price variance Quantity variance

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E10-3: Formula Method - DL

Labor rate variance = AQ (ar– sr)

LRV = 750 hrs. ($13.90 – $12.00 per hr.)

= $1,425 U

Labor quantity variance = sr (AQ – SQ)

LQV= $12.00/hr. (750 – 800 hrs.)

= - $600 F

Total variance = $1,425 – $600 = $825 U

04/19/23 A&MIS 212 16

Flexible Budget Method - DL

Flexible Flexible

Budget Budget

Actual (AQ input) (SQ input)

Cost incurred sp × AQ sp × SQ

750 hrs. 750 hrs. 800 hrs.

@ $13.90 = @ $12.00 = @ $12.00 =

$10,425 $9,000 $9,600

$1,425 U - $600 F

Price variance Quantity variance