Standard Costs and Variances

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Standard Costs and Variances

Chapter 11

11-2

Standard CostsStandards are benchmarks or “norms” for

measuring performance. In managerial accounting,two types of standards are commonly used.

Quantity standardsspecify how much of aninput should be used to

make a product orprovide a service.

Price standardsspecify how muchshould be paid for

each unit of theinput.

Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.

11-3

Standard Costs

DirectMaterial

Deviations from standards deemed significantare brought to the attention of management, apractice known as management by exception.

Type of Product Cost

Amou

nt

DirectLabor

ManufacturingOverhead

Standard

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Variance Analysis Cycle

11-5

Setting Standard CostsShould we use

ideal standards that require employees towork at 100 percent

peak efficiency?

Engineer Managerial Accountant

I recommend using practical standards that are currently

attainable with reasonable and efficient effort.

11-6

Setting Direct Materials Standards

Standard PriceStandard Priceper Unitper Unit

Summarized in a Bill of Materials.

Final, deliveredcost of materials,net of discounts.

Standard QuantityStandard Quantityper Unitper Unit

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Setting Direct Labor Standards

Use time and motion studies for

each labor operation.

Standard HoursStandard Hoursper Unitper Unit

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

Standard RateStandard Rateper Hourper Hour

11-8

Setting Variable Manufacturing Overhead Standards

The rate is the variable portion of the

predetermined overhead rate.

PriceStandard

The quantity is the activity in the allocation

base for predetermined overhead.

QuantityQuantityStandardStandard

11-9

Using Standards in Flexible Budgets

Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances.

Spending variances become more Spending variances become more useful by breaking them down into useful by breaking them down into

quantity and price variances.quantity and price variances.

11-10

Variance Analysis

Materials price varianceMaterials price varianceLabor rate varianceLabor rate varianceVOH rate varianceVOH rate variance

Materials quantity varianceMaterials quantity varianceLabor efficiency varianceLabor efficiency varianceVOH efficiency varianceVOH efficiency variance

A General Model for Variance Analysis

Quantity Variance Price Variance

11-11


Quantity Variance(2) – (1)

Price Variance(3) – (2)

(1)Standard Quantity

Allowed for Actual Output,at Standard Price

(SQ × SP)

(2)Actual Quantity

of Input,at Standard Price

(AQ × SP)

(3)Actual Quantity

of Input,at Actual Price

(AQ × AP)

Spending Variance(3) – (1)

11-12

A General Model for Variance AnalysisActual quantity is the amount of direct materials, direct labor,

and variable manufacturing overhead actually used.





(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


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





(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


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Actual price is the amount actuallypaid for the input used.





(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


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(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


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

11-16

Learning Objective 11-1

Compute the direct materials quantity and price variances and explain their

significance.

11-17

Glacier Peak Outfitters has the following direct materials 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 materials cost a

total of $1,029.

Materials Variances – An Example

11-18

200 kgs. 210 kgs. 210 kgs. × × × $5.00 per kg. $5.00 per kg. $4.90 per kg.

= $1,000 = $1,050 = $1,029

Quantity variance$50 unfavorable

Price variance$21 favorable

Materials Variances Summary

Standard Quantity Actual Quantity Actual Quantity × × × Standard Price Standard Price Actual Price

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= $1,000 = $1,050 = $1,029


0.1 kg per parka 2,000 parkas = 200 kgs



11-20



= $1,000 = $1,050 = $1,029


$1,029 210 kgs = $4.90 per kg



11-21

Materials Variances:Using the Factored Equations

Materials quantity varianceMQV = (AQ × SP) – (SQ × SP)

= 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

Materials price varianceMPV = (AQ × AP) – (AQ × SP)

= AQ(AP – SP)

= 210 kgs ($4.90/kg – $5.00/kg)

= 210 kgs (– $0.10/kg) = $21 F

11-22

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 manager’s performance.

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

the purchasing manager’s performance.

Responsibility for Materials Variances

11-23

I am not responsible for this unfavorable materials

quantity variance.

You purchased cheapmaterial, so my peoplehad to use more of it.

Your poor scheduling sometimes requires me to rush

order materials at a higher price, causing unfavorable price

variances.

Responsibility for Materials Variances

Production Manager Purchasing Manager

11-24


Compute the direct labor efficiency and rate

variances and explaintheir significance.

11-25

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

1.2 standard hours per parka at $10.00 per hour

Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000

parkas.

Labor Variances – An Example

11-26

Efficiency variance$1,000 unfavorable

Rate variance$1,250 unfavorable

Standard Hours Actual Hours Actual Hours × × × Standard Rate Standard Rate Actual Rate

Labor Variances Summary

2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour

= $24,000 = $25,000 = $26,250

11-27


= $24,000 = $25,000 = $26,250


1.2 hours per parka 2,000 parkas = 2,400 hours




11-28


= $24,000 = $25,000 = $26,250


$26,250 2,500 hours = $10.50 per hour




11-29

Labor Variances: Using the Factored Equations

Labor efficiency varianceLEV = (AH × SR) – (SH × SR)

= SR (AH – SH)

= $10.00 per hour (2,500 hours – 2,400 hours)

= $10.00 per hour (100 hours)

= $1,000 unfavorable

Labor rate varianceLRV = (AH × AR) – (AH × SR)

= AH (AR – SR)

= 2,500 hours ($10.50 per hour – $10.00 per hour)

= 2,500 hours ($0.50 per hour)

= $1,250 unfavorable

11-30

Responsibility for Labor Variances

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employee motivation.

Quality of production supervision.

Quality of training provided to employees.

11-31

I am not responsible for the unfavorable labor

efficiency variance!

You purchased cheapmaterial, so it took more

time to process it.

I think it took more time to process the materials

because the Maintenance

Department has poorly maintained your

equipment.

Responsibility for Labor Variances

11-32


Compute the variable manufacturing overhead

efficiency and rate variances and explain their

significance.

11-33

Glacier Peak Outfitters has the following direct variable manufacturing overhead labor standard for

its mountain parka.

1.2 standard hours per parka at $4.00 per hour

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

manufacturing overhead for the month was $10,500.

Variable Manufacturing Overhead Variances – An Example

11-34

2,400 hours 2,500 hours 2,500 hours × × × $4.00 per hour $4.00 per hour $4.20 per hour

= $9,600 = $10,000 = $10,500

Efficiency variance$400 unfavorable

Rate variance$500 unfavorable

Variable Manufacturing Overhead Variances Summary


11-35


= $9,600 = $10,000 = $10,500


1.2 hours per parka 2,000 parkas = 2,400 hours




11-36


= $9,600 = $10,000 = $10,500


$10,500 2,500 hours = $4.20 per hour




11-37

Variable Manufacturing Overhead Variances: Using Factored Equations

Variable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH – SR)

= SR (AH – SH)

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

= $4.00 per hour (100 hours)

= $400 unfavorable

Variable manufacturing overhead rate varianceVMRV = (AH × AR) – (AH – SR)

= AH (AR – SR)

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

= 2,500 hours ($0.20 per hour)

= $500 unfavorable

11-38

Variance Analysis and Management by Exception

How do I knowwhich variances to

investigate?

Larger variances, in dollar amount or as a

percentage of the standard, are

investigated first.

11-39

Advantages of Standard Costs

Management byexception

Advantages

Promotes economy and efficiency

Simplifiedbookkeeping

Enhances responsibility

accounting

11-40

PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuous improvement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between laborcost and output.

Potential Problems with Standard Costs

11-41

End of Chapter 11

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Standard Costs and Variances