Upload
kevin-long
View
34
Download
1
Tags:
Embed Size (px)
DESCRIPTION
Chapter 8. Standard Costs. Predetermined. Used for planning labor, material and overhead requirements. Benchmarks for measuring performance. Used to simplify the accounting system. Standard Costs. Standard Costs are. - PowerPoint PPT Presentation
Citation preview
Standard Costs
Chapter
8
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 2
Standard Costs
Standard Costs are
Predetermined.
Used for planning labor, materialand overhead requirements.
Benchmarks formeasuring performance.
Used to simplify theaccounting system.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 3
Standard Costs
DirectMaterial
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception.
Type of Product Cost
Am
ou
nt
DirectLabor
ManufacturingOverhead
Standard
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 4
Accountants, engineers, personnel administrators, and production managers combine efforts to set standards
based on experience and expectations.
Setting Standard Costs
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 5
Setting Standard Costs
Should we usepractical standardsor ideal standards?
Engineer ManagerialAccountant
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 6
Setting Standard CostsPractical standards
should be set at levelsthat are currently
attainable withreasonable andefficient effort.
Productionmanager
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 7
Setting Standard CostsI agree. Ideal standards,
that are based on perfection, are
unattainable and discourage most
employees.
HumanResourcesManager
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 8
Note
The argument that ideal standards are discouraging has been persuasive for many years. So “normal” defects and waste were built into the standards.
In recent years, TQM and other initiatives have sought to eliminate all defects and waste. Ideal standards, that allow for no waste, have
become more popular.The emphasis is on improvement over time, not
attaining the ideal standards right now.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 9
Setting Direct Material Standards
QuantityStandards
Use product design specifications.
PriceStandards
Final, deliveredcost of materials,net of discounts.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 10
Setting Direct Labor Standards
RateStandards
Use wage surveys and
labor contracts.
TimeStandards
Use time and motion studies for
each labor operation.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 11
Setting Variable Overhead Standards
RateStandards
The rate is the variable portion of the
predetermined overhead rate.
ActivityStandards
The activity is the base used to calculate
the predetermined overhead.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 12
Standard Cost Card – Variable Production Cost
A standard cost card for one unit of product might look like this:
A A x BStandard 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
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 13
Are standards the same as budgets?
A budget is set for total costs.
A standard is a per unit cost.
Standards are often used when putting together a budget.
Standards vs. Budgets
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 14
Standard Cost VariancesC
ost
Standard
This variance is unfavorablebecause the actual cost
exceeds the standard cost.
A standard cost variance is the amount by whichan actual cost differs from the standard cost.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 15
Standard Cost Variances
I see that thereis an unfavorable
variance.
But why arevariances
important to me?
First, they point to causes ofproblems and directions
for improvement.
Second, they trigger investigations in departments
having responsibility for incurring the costs.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 16
Variance Analysis Cycle
Prepare standard cost performance
report
Analyze variances
Begin
Identifyquestions
Receive explanations
Takecorrective
actions
Conduct next period’s
operations
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 17
Standard Cost Variances
Standard Cost Variances
Price Variance
The difference betweenthe actual price and the
standard price
Quantity Variance
The difference betweenthe actual quantity andthe standard quantity
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 18
A General Model for Variance Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard price is the amount that should have been paid for the resources acquired.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 19
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
A General Model for Variance Analysis
Standard quantity is the quantity allowed for the actual good output.
standard input per unit of output X amount of good output.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 20
A General Model for Variance Analysis
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
Price Variance Quantity Variance
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 21
Standard Costs
Let’s use the general model to
calculate standard cost variances,
starting withdirect material.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 22
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.
Material Variances Example
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 23
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
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 24
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
$1,029 210 kgs = $4.90 per
kg
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 25
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
0.1 kg per parka 2,000 parkas = 200 kgs
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 26
Note: Using the formulas
Materials price varianceMPV = AQ (AP - SP)
= 210 kgs ($4.90/kg - $5.00/kg)
= 210 kgs (-$0.10/kg)
= $21 F
Materials quantity varianceMQV = 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
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 27
Quick Check Suppose only 190 kgs of fiberfill were used to
make 2,000 parkas? What is the materials quantity variance? Remember that the standards call for 0.1 kg of fiberfill per parka at a cost of $5 per kg of fiberfill.
a. $50 F
b. $50 U
c. $100 F
d. $100 U
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 29
Quick Check If the material standard specifies exactly how
much material should be in the final product without any wastage, is a favorable (F) materials quantity variance a good thing?
a. Yes
b. No
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 31
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies.
The material cost a total of $6,630.
Material Variances Example Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 32
What is the actual price per poundpaid for the material?
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
What is the actual price per poundpaid for the material?
a. $4.00 per pound.
b. $4.10 per pound.
c. $3.90 per pound.
d. $6.63 per pound.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 34
Hanson’s material price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material price variance (MPV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 36
The standard quantity of material thatshould have been used to produce1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
The standard quantity of material thatshould have been used to produce1,000 Zippies is:
a. 1,700 pounds.
b. 1,500 pounds.
c. 2,550 pounds.
d. 2,000 pounds.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 38
Hanson’s material quantity variance (MQV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Hanson’s material quantity variance (MQV)for the week was:
a. $170 unfavorable.
b. $170 favorable.
c. $800 unfavorable.
d. $800 favorable.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 40
1,700 lbs. 1,700 lbs. 1,500 lbs. × × × $3.90 per lb. $4.00 per lb. $4.00 per lb.
= $6,630 = $ 6,800 = $6,000
Price variance$170 favorable
Quantity variance$800 unfavorable
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Material Variances Summary Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 41
Material Variances
Hanson 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.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 42
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000
Zippies.
Material Variances ContinuedZippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 43
Actual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price 2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb.
= $10,920 = $11,200
Price variance$280 favorable
Price variance increases because quantity
purchased increases.
Material Variances ContinuedZippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 44
Actual Quantity Used Standard Quantity × × Standard Price Standard Price 1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb.
= $6,800 = $6,000
Quantity variance$800 unfavorable
Quantity variance is unchanged because actual and standard
quantities are unchanged.
Material Variances ContinuedZippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 45
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 computingthe price variancewhen material is
purchased rather thanwhen it’s used.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 46
Responsibility for Material Variances
I am not responsible for this unfavorable material
quantity variance.
You purchased cheapmaterial, so my peoplehad to use more of it.
You used too much material because of poorly trained
workers and poorly maintained equipment.
Also, your poor scheduling sometimes requires me to
rush order material at a higher price, causing
unfavorable price variances.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 47
Standard Costs
Now let’s calculate standard cost variances for direct labor.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 48
Note
Materials variances:Material price variance
MPV = AQ (AP - SP)Material quantity variance
MQV = SP (AQ - SQ)
Labor variances:Labor rate variance
LRV = AH (AR - SR)
Labor efficiency varianceLEV = SR (AH - SH)
Actual hours
Actual rate
Standard rate
Standard hours allowed for the actual good output
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 49
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $6.00 perdirect labor hour
Last week 1,550 direct labor hours were worked at a total labor cost of $9,610 to
make 1,000 Zippies.
Labor Variances Example Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 50
What was Hanson’s actual rate (AR)for labor for the week?
a. $6.20 per hour.
b. $6.00 per hour.
c. $5.80 per hour.
d. $5.60 per hour.
What was Hanson’s actual rate (AR)for labor for the week?
a. $6.20 per hour.
b. $6.00 per hour.
c. $5.80 per hour.
d. $5.60 per hour.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 52
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor rate variance (LRV) for the week was:
a. $310 unfavorable.
b. $310 favorable.
c. $300 unfavorable.
d. $300 favorable.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 54
The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
The standard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is:
a. 1,550 hours.
b. 1,500 hours.
c. 1,700 hours.
d. 1,800 hours.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 56
Hanson’s labor efficiency variance (LEV)for the week was:
a. $290 unfavorable.
b. $290 favorable.
c. $300 unfavorable.
d. $300 favorable.
Hanson’s labor efficiency variance (LEV)for the week was:
a. $290 unfavorable.
b. $290 favorable.
c. $300 unfavorable.
d. $300 favorable.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 58
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor Variances Summary
Rate variance$310 unfavorable
Efficiency variance$300 unfavorable
1,550 hours 1,550 hours 1,500 hours × × × $6.20 per hour $6.00 per hour $6.00 per hour
= $9,610 = $9,300 = $9,000
Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 59
Labor Rate Variance – A Closer Look
High skill,high rate
Low skill,low rate
Using highly paid skilled workers toperform unskilled tasks results in an
unfavorable rate variance.
Production managers who make work assignmentsare generally responsible for rate variances.
Production managers who make work assignmentsare generally responsible for rate variances.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 60
Labor Efficiency Variance –A Closer Look
UnfavorableEfficiencyVariance
Poorsupervisionof workers
InsufficientDemand orBottlenecks
Poorlytrainedworkers
Poorquality
materials
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 61
Responsibility for Labor Variances
I am not responsible for the unfavorable labor
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 62
Responsibility for Labor Variances
Maybe I can attribute the laborand material variances to personnel
for hiring the wrong peopleand training them poorly.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 63
Standard Costs
Now let’s calculate standard cost
variances for the last of the variable production costs –
variable manufacturing
overhead.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 64
Note
Labor variances:Labor rate variance
LRV = AH (AR - SR)
Labor efficiency varianceLEV = SR (AH - SH)
Variable overhead variances:Variable overhead spending variance
VOSV = AH (AR - SR)
Variable overhead efficiency varianceVOEV = SR (AH - SH)
Actual hours of the allocation base
Actual variable overhead rate
Standard variable overhead rate
Standard hours allowed for the actual good output
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 65
Hanson Inc. has the following variable manufacturing overhead standard to
manufacture one Zippy:
1.5 standard hours per Zippy at $3.00 perdirect labor hour
Last week 1,550 hours were worked to make 1,000 Zippies, and $5,115 was spent for
variable manufacturing overhead.
Variable ManufacturingOverhead Variances Example Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 66
What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
What was Hanson’s actual rate (AR) for variable manufacturing overhead rate for the week?
a. $3.00 per hour.
b. $3.19 per hour.
c. $3.30 per hour.
d. $4.50 per hour.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 68
Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Hanson’s spending variance (VOSV) for variable manufacturing overhead forthe week was:
a. $465 unfavorable.
b. $400 favorable.
c. $335 unfavorable.
d. $300 favorable.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 70
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Hanson’s efficiency variance (VOEV) for variable manufacturing overhead for the week was:
a. $435 unfavorable.
b. $435 favorable.
c. $150 unfavorable.
d. $150 favorable.
Quick Check Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 72
Spending variance$465 unfavorable
Efficiency variance$150 unfavorable
1,550 hours 1,550 hours 1,500 hours × × × $3.30 per hour $3.00 per hour $3.00 per hour
= $5,115 = $4,650 = $4,500
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Variable ManufacturingOverhead Variances Zippy
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 73
Variable Manufacturing Overhead Variances – A Closer Look
If variable overhead is applied on the basisof direct labor hours, the labor efficiency
and variable overhead efficiency varianceswill move in tandem.
If variable overhead is applied on the basisof direct labor hours, the labor efficiency
and variable overhead efficiency varianceswill move in tandem.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 74
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.
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 75
Advantages of Standard Costs
Management byexception
Improved cost control and performance
evaluation
Better Informationfor planning anddecision making
Possible reductionsin production costs
Advantages
© The McGraw-Hill Companies, Inc., 2002Irwin/McGraw-Hill 76
PotentialProblems
Emphasis on negativemay impact morale.
Emphasizing standardsmay exclude other
important objectives.
Favorable variancesmay be misinterpreted.
Continuous improvementmay be moreimportant than
meeting standards.
Standard costreports may
not be timely.
Labor quantity standardsand efficiency variancesmay not be appropriate.