Presentation on theme: "Standard Costing and Variance Analysis"— Presentation transcript:
1Standard Costing and Variance Analysis April 1, 2017Standard Costing and Variance AnalysisUAA – ACCT Principles of Managerial Accounting Dr. Fred BarbeeFred Barbee
2Standard Costing and Variance Analysis April 1, 2017The Work of ManagementPlanningDecisionMakingEvaluatingOrganizing & DirectingControllingFred Barbee
3The Control Process Establish Standards Measure Actual Revise? Take ActionCompare Actual/Std.
4Standard Costing and Variance Analysis April 1, 2017Standard CostsPredeterminedUsed for planning labor, material, and overhead requirementsBenchmarks for measuring performance.Standard Costs areUsed to simplify the accounting system.Fred Barbee
5Standard Costing and Variance Analysis April 1, 2017Standard CostsManagers focus on quantities and costs that exceed standards, a practice known as management by exception.StandardAmountDirect MaterialDirect LaborManufacturing OverheadType of Product CostFred Barbee
6Setting Standard Costs Standard Costing and Variance AnalysisApril 1, 2017Setting Standard CostsAccountants, engineers, personnel administrators, and production managers combine efforts to set standards based on experience and expectations.Fred Barbee
7Setting Standard Costs Standard Costing and Variance AnalysisApril 1, 2017Setting Standard CostsShould we use practical standards or ideal standards?EngineerManagerial AccountantFred Barbee
8Setting Standard Costs Standard Costing and Variance AnalysisApril 1, 2017Setting Standard CostsPractical standards should be set at levels that are currently attainable with reasonable and efficient effort.Production managerFred Barbee
9Setting Standard Costs Standard Costing and Variance AnalysisApril 1, 2017Setting Standard CostsI agree. Ideal standards, based on perfection, are unattainable and discourage most employees.Human Resources ManagerFred Barbee
10A Standard is . . . A benchmark or “norm” for measuring performance. They are “expected” levels of performance.They are monetary measures to which actual costs are compared.
11Standard Costs . . . Are realistically predetermined costs for Direct materialsDirect laborFactory overheadThey are typically expressed as cost per unit of finished product.
12Why Standard Costs? They are useful in preparing operating budgets. They make it easier to pinpoint production costs that must be controlled.They are useful in evaluating performance of managers and workers.
13Why Standard Costs? They help in setting realistic prices. They simplify accounting procedures for inventories and product costing.
15Standard Costing and Variance Analysis April 1, 2017Setting DM StandardsPrice StandardsFinal, delivered cost of materials, net of discounts.Quantity StandardsUse product design specifications.Fred Barbee
16Standard Costing and Variance Analysis April 1, 2017Setting DL StandardsRate StandardsUse wage surveys and labor contracts.Time StandardsUse time and motion studies for each labor operation.Fred Barbee
17Standard Costing and Variance Analysis April 1, 2017Setting VOH StandardsRate StandardsThe rate is the variable portion of the predetermined overhead rate.Activity StandardsThe activity is the base used to calculate the predetermined overhead.Fred Barbee
18Standard Costing and Variance Analysis April 1, 2017Standards vs. BudgetsAre standards the same as budgets?A budget is set for total costs.A standard is a per unit cost.Standards are often used when preparing budgets.Fred Barbee
19Standard Cost Variances Standard Costing and Variance AnalysisApril 1, 2017Standard Cost VariancesA standard cost variance is the amount by which an actual cost differs from the standard cost.This variance is unfavorable because the actual cost exceeds the standard cost.StandardCostFred Barbee
21HOTS, Inc.To illustrate the use of standard costs, consider Herman O Thompson Sports, Inc. (HOTS, Inc.), a manufacturer of a popular jogging suit. The company wishes to have standard costs developed for the suit in terms of Direct Material, Direct Labor and Manufacturing Overhead.
22Determining Standard Cost The Quantity Decision – the amount of input to be used for a standard unit of output.The Pricing Decision – the amount that should be paid for the quantity of the input to be used.
23Standard DM Price/Unit The standard price per unit for DM should be the final, delivered cost of materials.Specified quantity of materials,Quantity discounts,Transportation (freight) costs,Receiving and handling costs,Seasonal availability (if any).
24Standard DM Price/Unit A material known as crylon is used in the jogging suits. The standard price for a yard of crylon is determined as follows:Purchase Price, Grade A Crylon$5.70Freight, by Truck.40Receiving & Handling.10Less Discount (20,000 yard lots)(.20)Standard Price Per Yard$6.00
25Standard DM Quantity/Unit The amount of materials that should go into each finished unit of productEngineered (bill of materials) requirements,Expected spoilage of RM,Unavoidable waste,DM in scrapped WIP (Rejects).
26Standard DM Quantity/Unit The standard quantity of crylon that goes into one jogging suit is computed as follows:Bill of Materials Requirement2.8 YdsAllowance for Waste0.6 YdsAllowance for Rejects0.1 YdsStandard Quantity/Jogging Suit3.5 Yds
27Standard DM Quantity/Unit Once the price and standard quantities have been set, the standard cost of materials (crylon) for one unit of finished product can be computed.3.5 Yards per jogging suit x $6.00 per yard = $21.00
28Standard Rate For DL Hour The standard rate per hour for DL should include all costs associated with DL workers:Hourly wage ratesExpected labor mixFringe benefitsEmployment taxes
29Standard DL Rate Per Hour The standard rate per hour for the expected mix is determined by using average wage rates, fringe benefits, and employment taxes for the labor mix.Average wage rate per hour$13Average fringe benefits4Average employment taxes1Standard rate per DL hour$18.
30Standard Hours Per Unit Engineered labor time per unit.Allowance for breaks, personal needs, and cleanup.Allowance for setup and other machine downtime.Allowance for rejects.
31Standard DL Hours Per Unit The standard hours determined to produce a jogging suit is determined as follows:Basic labor time per unit1.4 HrsAllowance for breaks & cleanup0.1 HrsAllowance for setup and downtime0.3 HrsAllowance for rejects0.2 HrsStandard Hours Per Jogging Suit2.0 Hrs
322.0 Hrs per Jogging Suit x $18 per Hour = $36 per Suit Standard DL CostsOnce the time and rate standards have been set, the standard cost of labor for one unit of product can be computed.2.0 Hrs per Jogging Suit x $18 per Hour = $36 per Suit
33Variable OH StandardsStandards exist for VOH and are typically expressed in terms of “rate” and “hours.”The rate is the variable portion of the PORThe hours represent the base used to apply overhead to products.
34Variable OH StandardsHOTS, Inc. applies MOH costs to products on the basis of DL hours.The variable portion of the POR is $4 per DL hour.Using this rate, the standard cost of variable overhead for one unit of product is (2 DL Hours x $4 per Hour = $8 per suit).
35Standard Cost CardAfter standards have been set for DM, DL and MOH, a standard cost card can be prepared.The cost card indicates what the final, manufactured cost should be for a unit of product.
36Standard Cost Card For Jogging Suits HOTS, Inc.Standard Cost Card For Jogging SuitsQuantityPriceCostDirect Materials3.5 Yds.$6/Yd.$21Direct Labor2.0 Hrs.18/Hr.36Variable Overhead2.0 Hrs.4/Hr.8Standard Cost Per Unit$65
37A General Model For Variance Analysis Variable Production Costs AQ x APAQ x SPSQ x SPDM Price VarianceDM Quantity Var.DL Rate VarianceDL Efficiency Var.VOH Spending Var.VOH Efficiency Var.VarianceVarianceTotal Variance
38DM Price Variances . . .(AQ x AP) - (AQ x SP)AQ(AP - SP)
39DM Quantity Variances . . .(AQ x SP) - (SQ x SP)SP(AQ - SQ)