Using Standard-Costing Systems for Control

8/6/2019 Using Standard-Costing Systems for Control

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STANDARD COSTa budget for the

production of oneunit of product or

service

ACTUAL COSTused in the

production of theproduct or service

COST VARIANCEthe differencebetween the

actual cost andthe standard cost

COST VARIANCEthe differencebetween the

actual cost andthe standard cost

Using Standard-Costing

Systems for Control


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STANDARD COSTING

- DEFINITION

STANDARD COSTING may be

defined basically as a technique of cost

accounting which compares the standar

cost of each product or service with theactual cost, to determine the efficiency of

the operation, so that any remedial action

may be taken immediately.

The standard cost is a predeterminedcost which determines what each product

or service should cost under given

circumstances.


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The Need for Standards

Standards Are common in business

Are often imposed by government agencies (andcalled regulations)

Standard costs Are predetermined unit costs

Used as measures of performance


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ADVANTAGES OF

STANDARD COSTING

Costing procedures are often simplified.

Provides a valuable aid to management in

determining prices and formulating

policies.

The evaluation of stock is facilitated.

The operation of cost centers defines

responsibilities.


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STANDARD COSTING

- LIMITATIONS VARIATION IN PRICE

VARYING LEVELS OF OUTPUT

CHANGING STANDARD OF

TECHNOLOGY

ATTITUDE OF TECHNICAL PEOPLE MIX OF PRODUCTS

DO NOT REFLECT THE TRUE VALUE

AND EXCHANGE

BASED ON THEORETICAL MAXIMUM

EFFICIENCY, ATTAINABLE GOOD

PERFORMANCE & AVERAGE PASTPERFORMANCE


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Standard Costing: Advantages Allows managers to

use management by

exception

Provides a basis forsensible cost

comparisons

Provides a means of

performanceevaluation and

rewards for

employees

Provides motivationfor employees to

adhere tostandards

Results in morestable product

costs

Is less expensivethan actual- ornormal- costing

systems


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Criticisms Of Standard Costing In

Todays Environment Shorter product life cycles meanthat standards are only relevant

for a short time

Too much focus on cost

minimization rather thanincreasing product quality or

customer service

Automated manufacturing

processes tend to be more

consistent in meeting

production specifications.

Not defined broadly enough to

capture important aspect of

ownership

Variances are often too

aggregated. They are not tied

to specific product lines,

production batches, or to the

flexible management system

Variances are often too late to

be useful

Standard costing out of step

with the philosophy of cost

management systems and

activity-based management

Too much focus on the cost and

efficiency of direct labor


9/18

Standard quantity:

Fabric in finished

product 11 sq. metersAllowance for

normal waste 1 sq. meters

Total standard

quantity required

per tent 12 sq. meters

Purchase price per

sq. m e te r of fa bric(ne t of purcha se

discounts) $7.75Tra nspo rta tion cost

pe r sq. m e te r 0.25ota sta n a r pr ce

pe r sq. me te r of

fabric $8.00

KoalaCampGearCompany

DIRECT MATERIAL STANDARDS

The total amount of material

normally required to produce

a finished product including

allowances for normal wasteor efficiency

The total deliveredcost, after

subtracting anypurchase discounts

Cost VarianceAnalysis


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Koala CampGear Company

DIRECT LABOR STANDARDS

S a n a r

q a n y :D r e l a o r

r e q r e p e r e n 2 hours

S a n a r r a e :

Ho r l y a e r a e $15

Fr n e e n e(20% o a e ) 3

T o a l a n a r

r a e p e r o r $18

CostVarianceAnalysis


11/18

Direct material:

Standard direct-material

cost per tent (12 sq.

meters x $8 pr sq. meter) $96Actual output x3 000

Total standard direct-

material cost $288,000

labor:

Direct labor costper tent (2 hours x

$16 per hour) $36

Actual output X 3 ,000

otal standard

direct-labor cost $108,000

Koala CampGearCompany

The standard cost forthe direct-material

and direct-labor inputsis based upon Koalas

actual output of3,000 tents

They should incura cost of$396,000

($288,000 + $108,000)

to make 3,000 tents

StandardCostsGiven Actual

Output


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Second, the company used more fabric than the standard price.

36,400 s . meters actually used, instead of the standard amount of36,000 s . meters

Direct-material uantity variance = AQ X SP - SQ X SP =SQ AQ - SQ where

AQ = Actual uantity used

SQ = Standard uantity allowedKoalas direct- material uantity variance for June

is computed as followsDirect-material uantity variance = SP AQ - SQ

= $8.00 36,400 - 36,000=$3,200 unfavorable

Koalas direct- material uantity variance for Juneis computed as follows

Direct-material uantity variance = SP AQ - SQ= $8.00 36,400 - 36,000

=$3,200 unfavorable

What caused Koala to spend more than theanticipated amount on direct material?

Direct-Material Variances


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40,000 s .meters

purchased

$8.15 pers . meter

40,000 s .meters

purchased

$8.00 pers . meter

36,000s . meters

allowed

$8.00 pers . meter

$326,000 $320,000 $288,000

$6,000U

36,400 s .meters

used

$8.00per s .

meter

$291,200

Direct-material price variance

$3,200U

Direct-materialuantity

variance

xx x

Analysis Of Material

VariancesActualActualuantityuantityActualActualpricepriceActualActualuantityuantity StandardStandardpriceprice StandardStandarduantityuantity StandardStandardpricepricexxxx xx

Exh.

16-1


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What caused Koala to spend more than theanticipated amount on direct material?

irst, the company purchased fabric at a higher price $8.15 pers uare meter than the standard price $8.00 per s uare meter .

Direct-material price variance = PQ X AP - PQ X SP = PQ AP - SPwhere PQ = Quantity purchased

AP = Actual price

SP = Standard priceKoalas direct- material price variance for June is computed as follows

Direct-material price variance = PQ AP - SP= 40,000 $8.15 - $8.00 = $6,000 unfavorable

Direct-Material Variances


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Causes of Labor Variances

Labor variances may be caused by avariety of factors

Labor price variances usually result from eitherpaying

workers higher wages than expected ormisallocatingworkers (for ex., using skilled workers in place ofunskilled workers)

Labor quantity variances relate to the efficiency ofworkers and are usually related to the production

department


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X X X

Actual Labor Cost Standard Labor Cost

Actualhours

Standardprice

Actualrate

Actualhours

Standardrate

Standardrate

XXX

5,900

hoursused

$19

perhour

5,900

hoursused

$18

perhour

6,000

hoursallowed

$18

perhour

$112,100 $106,200 $108,000

$5,900 Unfavorable $1,800 avorable

Direct-laborrate variance

Direct-laborefficiency variance

$4,100 Unfavorable

Direct-labor variance

Analysis of Direct-Labor

Variances

Exh.

16-2


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Reporting Variances

Reporting variances All variances should be reported to appropriate

levels of management as soon as possible so that

corrective action can be taken The form, content, and frequency of variance

reports vary considerably among companies

Variance reports facilitate the principle of

management by exception In using variance reports, top management normally

looks forsignificant variances


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Causes ofManufacturing

Overhead Variances Manufacturing overhead variances may

be caused by a variety of factors The controllable variance relates to variable

manufacturing costs and usually is the responsibilityof the production department May result from eitherhigher than expected use ofindirect materials,

indirect labor or supplies orincreases in indirect manufacturing costssuch as fuel

The volume variance may be the responsibility of the

production department (inefficient use of direct laborhours) or may come from outside the productiondepartment (lack of sales orders)

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Using Standard-Costing Systems for Control