Session_8-Part2-Students (1 Slide Per Page)

8/13/2019 Session_8-Part2-Students (1 Slide Per Page)

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Chapter Ten

Standard Costs andOverhead Analysis


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Standard Costs

Standards are benchmarks or normsfor measuring performance. Two types

of standards are commonly used.

Quantity standardsspecify how much of aninput should be used to

make a product orprovide a service.

Cost (price)standards specify

how much should bepaid for each unit

of the input.


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Standard Costs

DirectMaterial

Deviations from standards deemed significantare brought to the attention of management, a

practice known as management by exception.

Type of Product Cost

Amoun

t

Direct

Labour

Manufacturing

Overhead

Standard


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Variance Analysis Cycle

Prepare standardcost performance

report

Analyzevariances

Begin

Identify

questions

Receive

explanations

Take

correctiveactions

Conduct nextperiods

operations

Exhibit10-1


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Accountants, engineers, purchasing

agents, and production managerscombine efforts to set standards that encourage

efficient future production.

Setting Standard Costs


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Setting Standard Costs

Should we useideal standards that

require employees towork at 100 percent

peak efficiency?

Engineer ManagerialAccountant

I recommend using practicalstandards that are currently

attainable with reasonable andefficient effort.


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Setting Direct Material Standards

Price

Standards

Summarized ina Bill of Materials.

Final, deliveredcost of materials,net of discounts.

Quantity

Standards


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Setting Direct Labour Standards

Rate

Standards

Often a singlerate is used that reflectsthe mix of wages earned.

Thisimagecannotcurrently bedisplayed.

Time

Standards

Use time andmotion studies for

each labour operation.


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Setting Variable Overhead Standards

Rate

Standards

The rate is thevariable portion of the

predetermined overheadrate.

Activity

Standards

The activity is thebase used to calculate

the predeterminedoverhead.


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Standard Cost Card VariableProduction Cost

A standard cost card for one unit of

product might look like this:

A A x B

Standard Standard StandardQuantity 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


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Are standards the

same as budgets?A budget is set fortotal costs.

Standards vs. Budgets

A standard is a perunit cost.

Standards are oftenused when

preparing budgets.


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Price and Quantity Standards

Price and and quantity standards are

determined separately for two reasons:

The purchasing manager is responsible for rawmaterial purchase prices and the production manageris 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 aperiod of time before being used in production.


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A General Model for Variance Analysis

Variance Analysis

Price Variance

Difference betweenactual price andstandard price

Quantity Variance

Difference betweenactual quantity andstandard quantity


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Variance Analysis

Price Variance Quantity Variance

Materials price varianceLabour rate variance

VOH spending variance

Materials quantity varianceLabour efficiency varianceVOH efficiency variance



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Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price



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Actual quantity is the amount of directmaterials, direct labour, and variablemanufacturing overhead actually used.


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Standard quantity is the standard quantityallowed for the actual output of the period.


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Actual price is the amount actuallypaid for the input used.


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Standard price is the amount that shouldhave been paid for the input used.





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(AQ AP) (AQ SP) (AQ SP) (SQ SP)AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity





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Glacier Peak Outfitters has the following directmaterial standard for the fiberfill in its mountain

parka.

0.1 kg. of fiberfi ll per parka at $5.00 per kg.

Last month 210 kgs of fiberfill were purchased

and used to make 2,000 parkas. The materialcost a total of $1,029.

Material Variances Example


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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 favourable

Quantity variance$50 unfavourable



Material Variances Summary


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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


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Responsibility for Material Variances

Materials Price VarianceMaterials Quantity Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing managers performance.


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I am not responsible forthis unfavourable material

quantity variance.

You purchased cheap

material, so my peoplehad to use more of it.

Your poor schedulingsometimes requires me to

rush order material at ahigher price, causing

unfavourable price variances.

Responsibility for Material Variances


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Hanson Inc. has the following direct materialstandard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week, 1,700 pounds of material werepurchased and used to make 1,000 Zippies.

The material cost a total of $6,630.

ZippyQuick Check


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Quick Check Zippy

Hansons material price variance (MPV)for the week was:

a. $170 unfavourable.

b. $170 favourable.

c. $800 unfavourable.

d. $800 favourable.


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Quick Check

Hansons material quantity variance (MQV)for the week was:

a. $170 unfavourable.b. $170 favourable.


d. $800 favourable.

Zippy


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Isolation of Material Variances

I need the price variancesooner so that I can better

identify purchasing problems.

You accountants just dontunderstand the problems thatpurchasing managers have.

Ill start computingthe price variance

when material ispurchased rather thanwhen its used.


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Material Variances

Hanson purchased andused 1,700 pounds.

How are the variancescomputed if the amountpurchased differs from

the amount used?

The price variance iscomputed on the entire

quantity purchased.

The quantity varianceis computed only on

the quantity used.


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Hanson Inc. has the following material standardto manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week, 2,800 pounds of material werepurchased at a total cost of $10,920, and 1,700

pounds were used to make 1,000 Zippies.

ZippyQuick Check Continued


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Glacier Peak Outfitters has the following directlabour standard for its mountain parka.

1.2 standard hours per parka at $10.00 per hour

Last month, employees actually worked 2,500hours at a total labour cost of $26,250 to make

2,000 parkas.

Labour Variances Example


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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

Rate variance$1,250 unfavourable

Efficiency variance$1,000 unfavourable

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate

Labour Variances Summary


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Responsibility for Labour Variances

Production Manager

Production managers areusually held accountable

for labour variancesbecause they can

influence the:

Mix of skill levels

assigned to work tasks.

Level of employeemotivation.

Quality of productionsupervision.

Quality of trainingprovided to employees.

Responsibility for


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Responsibility forLabour Variances

I am not responsible forthe unfavourable labourefficiency variance!

You purchased cheap

material, so it took moretime to process it.

I think it took more timeto process the

materials because theMaintenanceDepartment has poorly

maintained your

equipment.


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Hansons labour rate variance (LRV) forthe week was:


b. $310 favourable.


d. $300 favourable.

Quick Check Zippy


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Hansons labour efficiency variance (LEV)for the week was:


b. $590 favourable.


d. $600 favourable.

Quick Check Zippy

Variable Manufacturing Overhead


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Glacier Peak Outfitters has the following direct

variable manufacturing overhead labourstandard for its mountain parka.

1.2 standard hours per parka at $4.00 per hour

Last month, employees actually worked 2,500hours to make 2,000 parkas. Actual variable

manufacturing overhead for the month was$10,500.

Variable Manufacturing OverheadVariances Example



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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

Spending variance$500 unfavourable

Efficiency variance$400 unfavourable

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate

Variable Manufacturing OverheadVariances Summary



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Variable Manufacturing OverheadVariances: Using Factored Equations

Variable manufacturing overhead spending variance

VMSV = AH (AR - SR)

= 2,500 hours ($4.20 per hour $4.00 per hour)

= 2,500 hours ($0.20 per hour)

= $500 unfavourable

Variable manufacturing overhead efficiency varianceVMEV = SR (AH - SH)

= $4.00 per hour (2,500 hours 2,400 hours)

= $4.00 per hour (100 hours)= $400 unfavourable

Q i k Ch k


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Hanson Inc. has the following variablemanufacturing overhead standard to

manufacture one Zippy:

1.5 standard hours per Zippy at $3.00 perdirect labour hour

Last week, 1,550 hours were worked to make

1,000 Zippies, and $5,115 was spent forvariable manufacturing overhead.

ZippyQuick Check

Quick Check


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Hansons spending variance (VOSV) forvariable manufacturing overhead forthe week was:



d. $300 favourable.

Quick CheckZippy

Quick Check


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Hansons efficiency variance (VOEV) forvariable manufacturing overhead for theweek was:



d. $150 favourable.

Quick CheckZippy

Overhead Rates and Overhead Analysis


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Overhead from theflexible budget for the

denominator level of activityPOHR =

Recall that overhead costs are assigned to

products and services using a predeterminedoverhead rate (POHR):

Assigned Overhead = POHR Standard Activity

Denominator level of activity



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The predetermined overhead rate

can be broken down into fixedand variable components.

The variablecomponent is useful

for preparing and analyzing

variable overheadvariances.

The fixedcomponent is useful

for preparing and analyzing

fixed overheadvariances.


Normal versus Standard Cost Systems


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Normal versus Standard Cost Systems

In a normal cost

system, overhead isapplied to work inprocess based onthe actual numberof hours worked

in the period.

In a standard cost

system, overhead isapplied to work inprocess based on

the standard hoursallowed for the actualoutput of the period.

Fixed Overhead Variances


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BudgetVariance

VolumeVariance

FR = Standard Fixed Overhead RateSH = Standard Hours AllowedDH = Denominator Hours

SH FR

Actual Fixed Fixed FixedOverhead Overhead Overhead

Incurred Budget Applied

Fixed Overhead Variances

DH FR

Overhead Rates and OverheadA l i E l


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ColaCo prepared this budget for overhead:

Analysis Example

Total Variable Total Fixed

Machine Variable Overhead Fixed Overhead

Hours Overhead Rate Overhead Rate

3,000 6,000$ ? 9,000$ ?

4,000 8,000 ? 9,000 ?

ColaCo applies overhead basedon machine-hour activity.

Lets calculate overhead rates.



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Rate = Total Variable Overhead Machine Hours

This rate is constant at all levels of activity.




3,000 6,000$ 2.00$ 9,000$ ?

4,000 8,000 2.00 9,000 ?


Analysis Example



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3,000 6,000$ 2.00$ 9,000$ 3.00$

4,000 8,000 2.00 9,000 2.25

Rate = Total Fixed Overhead Machine Hours

This rate decreases when activity increases.


Analysis Example



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3,000 6,000$ 2.00$ 9,000$ 3.00$

4,000 8,000 2.00 9,000 2.25

The total POHR is the sum ofthe fixed and variable rates

for a given activity level.


Analysis Example

Fixed Overhead Variances Example


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ColaCos actual production required 3,200standard machine hours. Actual fixed overheadwas $8,450. The predetermined overhead rate

is based on 3,000 machine hours.


Overhead Variances


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Overhead Variances

Now lets turnour attentionto calculating

fixed overheadvariances.



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Budget variance$550 favorable

$8,450 $9,000



Fixed Overhead Variances A Cl L k


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A Closer Look

Budget Variance

Results from spendingmore or less thanexpected for fixed

overhead items.

Now, lets use thestandard hours allowed

to compute the fixedoverhead volume

variance.



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3,200 hours

$3.00 per hour

Budget variance$550 favorable

p

$8,450 $9,000 $9,600

Volume variance$600 favorable

SH FR



Volume Variance A Closer Look


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Volume

Variance

Results when standard hoursallowed for actual output differsfrom the denominator activity.

Unfavorablewhen standard hours< denominator hours

Favorablewhen standard hours> denominator hours

Volume Variance A Closer Look


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Volume

Variance

Results when standard hoursallowed for actual output differsfrom the denominator activity.

Unfavorablewhen standard hours< denominator hours

Favorablewhen standard hours> denominator hours

Does not measure over-or under spending

It results from treating fixedoverhead as if it were a

variable cost.

Quick Check


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Yoder Enterprises actual production for theperiod required 2,100 standard direct labor

hours. Actual fixed overhead for the periodwas $14,800. The budgeted fixed overheadwas $14,450. The predetermined fixed

overhead rate was $7 per direct labor hour.What was the budget variance?

a. $350 U

b. $350 Fc. $100 F

d. $100 U

Quick Check


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Yoder Enterprises actual production for theperiod required 2,100 standard direct labor

hours. Actual fixed overhead for the periodwas $14,800. The budgeted fixed overheadwas $14,450. The predetermined fixed

overhead rate was $7 per direct labor hour.What was the volume variance?

a. $250 U

b. $250 Fc. $100 F

d. $100 U

Overhead Variances and Under- orOverapplied Overhead Cost


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Overapplied Overhead Cost

In a standard

cost system:

Unfavorable

variances are equivalentto underapplied overhead.

Favorable

variances are equivalentto overapplied overhead.

The sum of the overhead variancesequals the under- or overapplied

overhead cost for a period.

Theoretical vs. Practical Capacity


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Theoretical capacity

is the volume ofcapacity if all available

production time isused and no waste

occurs.(i.e.. operations conducted24 hours per day, 7 daysper week, 365 days per

year, with no downtime)

Practical capacity

represents whatcould be producedwith operations at

theoretical capacity

less unavoidabledowntime.

Variance Analysis andManagement by Exception


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Management by Exception

How do I know

which variances toinvestigate?

Larger variances, indollar amount or asa percentage of the

standard, areinvestigated first.

A Statistical Control ChartExhibit10-9


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1 2 3 4 5 6 7 8 9

Variance Measurements

Favourable Limit

Unfavourable Limit

Warning signals for investigation

Desired Value

Advantages of Standard Costs


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Management by

exception

Advantages

Promotes economy

and efficiency

Simplifiedbookkeeping

Enhances

responsibilityaccounting

Potential Problems with Standard Costs


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PotentialProblems

Emphasis on

negative mayimpact morale.

Emphasizing standardsmay exclude other

important objectives.

Favourablevariances may

be misinterpreted.

Continuousimprovement maybe more important

than meeting standards.

Standard cost

reports maynot be timely.

Invalid assumptionsabout the relationship

between labourcost and output.

Documents

Session_8-Part2-Students (1 Slide Per Page)