Presentation on theme: "Standard Costing: A Managerial Control Tool"— Presentation transcript:
1 Standard Costing: A Managerial Control Tool CHAPTER
2 After studying this chapter, you should be able to: Objectives1. Tell how unit standards are set and why standard costing systems are adapted.2. State the purpose of a standard cost sheet.3. Describe the basic concepts underlying variance analysis, and explain when variances should be investigated.4. Compute the material and labor variances, and explain how they are used for control.After studying this chapter, you should be able to:Continued
3 Objectives5. Calculate the variable and fixed overhead variances, and give their definitions.6. Appendix: Prepare journal entries for materials and labor variances, and show how to account for overhead variances.
4 Cost control often means the difference between success and failure.
5 Why Standard Cost Systems Are Adopted Standard costing systems enhance planning and control and improve performance measurement.Standard costing systems facilitate product costing.
6 Cost Assignment Approaches Manufacturing CostsDirect DirectMaterials Labor OverheadActual costing system Actual Actual ActualNormal costing system Actual Actual BudgetedStandard costing system Standard Standard Standard
7 Standard Cost Sheet for Corn Chips Standard Standard StandardPrice Usage Cost SubtotalDescriptionDirect materials:Yellow corn $ oz. $0.108Cooking oil ozSalt ozLime ozBags bagTotal direct materials $0.223
8 Standard Cost Sheet for Corn Chips Standard Standard StandardPrice Usage Cost SubtotalDescriptionDirect materials $0.223Direct labor:Inspectors $ hr. $0.049Machine operators hrTotal direct laborOverhead:Variable overhead hr. $0.030Fixed overhead hrTotal overheadTotal standard unit cost $0.560
9 The standard quantity of yellow corn meal per package is 18 ounces. During the first week of March, 100,000 packages of corn chips are produced.The standard quantity of yellow corn meal per package is 18 ounces.
10 Standard Quantity of Materials Allowed Standard Hours Allowed SQ = Unit quantity standard x Actual output= 18 x 100,000= 1,800,000 ouncesStandard Hours AllowedSH = Unit labor standard x Actual output= x 100,000= 80 direct labor hours
11 Total variance = Price variance + Usage variance = (AP – SP)AQ + (AQ – SQ)SP= [(AP x AQ) – (SP x AQ)]+ [(SP x AQ) – (SP x SQ)]= (AP x AQ) – (SP x AQ)]+ (SP x AQ) – (SP x SQ)= (AP x AQ) – (SP x SQ)
12 Variance Analysis: General Description 1. AP x AQ (Actual Quantity of Input at Actual Price)2. SP x AQ (Actual Quantity of Input at Standard Price)3. SP x SQ (Standard Quantity of Input at Standard Price)Price Variance (1-2)Usage Variance (2-3)Budget Variance (1-3)
13 Favorable variances occur whenever the opposite occurs. Unfavorable variances occur whenever actual prices or usage of inputs are greater than standard prices or usage.Favorable variances occur whenever the opposite occurs.
15 Variance Analysis: Materials and Labor Actual production 48,500 bags of corn chipsActual cost of corn 780,000 ounces of $ = $5,382Actual cost of inspection labor 360 hours at $7.35 = $2,646Actual Costs Budgeted Costs Total VarianceCorn $5, $5, $ UInspection labor 2, , U
16 Variance Analysis: Columnar Approach AQ x AP 780,000 x $5,382AQ x SP780,000 x $$4,680SQ x SP873,000 x $0.0060$5,238$702 UPrice Variance$558 FUsage Variance$144 UTotal Variance
17 MPV = (AP – SP)AQ Material Price Variance The actual price per unit The standard price per unitThe actual quantity of material used
18 Material Price Variance MPV = (AP – SP)AQ= ($ – $0.0060)780,000= $ x 780,000= $702 UPercent of SP x SQ = $702/$4,680 = 15%
19 MUV = (AQ – SQ)SP Direct Materials Usage Variance The actual quantity of materials usedThe standard quantity of materials allowed for the actual outputThe standard price per unit
20 Direct Materials Usage Variance MUV = (AQ – SQ)SP= (780,000 – 873,000)($0.006)= 93,000 x $0.006= $558 FPercent of SQ x SP = $558/$5,238 = 10.7%
21 LRV = (AR – SR)AH Labor Rate Variances The actual hourly wage rate The standard hourly wage rateThe actual direct labor hours used
22 Percent of SR x SH = $126/$2,520 = 5% Labor Rate VariancesLRV = (AR – SR)AH= ($7.35 – $7.00)360= $0.35 x 360= $126 UPercent of SR x SH = $126/$2,520 = 5%
23 Labor Variances: Columnar Approach AH x AR360 x $735$2,646AH x SR360 x $7.00$2,520SH x SR339.5 x $7.00$2,376.50$126 URate Variance$ UEfficiency Variance$ UTotal Variance
24 LEV = (AH – SH) SR Labor Efficiency Variances The actual direct labor hours usedThe standard direct labor hours that should have been usedThe standard hourly wage rate
25 Percent of SH x SR = $143.50/$2,376.50 = 6% Labor Efficiency VariancesLEV = (AH – SH)SR= (360 – 339.5)$7= 20.5 x $7= $ UPercent of SH x SR = $143.50/$2, = 6%
26 Variable Overhead Variances Variable overhead rate (standard) $3.85/DLHActual variable overhead costs $1,600 Actual hours worked 400Bags of chips produced 48,500Hours allowed for production 373.3Applied variable overhead $1,456
27 Variable Overhead Variances: Columnar Approach Actual VO$1,600VO Rate x Actual Hours$1,540VO Rate x Standard Hours$1,456$60 USpending Variance$84 UEfficiency Variance$144 UTotal Variance
28 VOSV = (AVOR x AH) – (SVOR x AH) Variable Overhead Spending VariancesVOSV = (AVOR x AH) – (SVOR x AH)= (AVOR – SVOR)AH= ($4.00 – $3.85)400= $60 U
29 Flexible Budget Performance Report For the Week Ended March 8, 2004 Crunch Chips, Inc.Flexible Budget Performance ReportFor the Week Ended March 8, 2004Cost FormulaActual CostsSpending VarianceBudgetGas $3.00 $1,190 $1,200 $10 FElectricity UWater FTotal cost $3.85 $1,600 $1, $60 U
30 For the Week Ended March 8, 2004 Crunch Chips, Inc.Performance ReportFor the Week Ended March 8, 2004Budget for Standard HoursCost FormulaActual CostsSpending VarianceEfficiencyVarianceBudgetGas $3.00 $1,190 $1,200 $10 FElectricity UWater FTotal cost $3.85 $1,600 $1, $60 U$1,135 $65 UUU$1,456 $84 U
31 Fixed Overhead Variances Budgeted or Planned ItemsBudgeted fixed overhead $749,970Practical activity 23,400 direct labor hoursStandard fixed overhead rate $32.05Hours allowed to produce 3,000,000 bags of chips: x 3,000,000 = $23,400Actual ResultsActual production 2,750,000 bags of chipsActual fixed overhead cost $749,000Standard hours allowed for actual production 21,450
32 Total Fixed Overhead Variances Applied fixed overheadStandard fixed overhead rate x Standard hours== $32.05 x 21,450= $687,473 (rounded)Total fixed overhead variance$749,000 – $687,473== $61,527 underapplied
37 Material Price Variance The actual price is $ per ounce of corn and standard price is $0.0060, and 780,000 ounces of corn are purchased.Materials InventoryMaterials Price VarianceThe receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.Accounts PayableMaterial Price Variance
38 Material Usage Variance During the period 780,000 ounces of corn is placed into production. The standard quantity is 873,000 ounces, and standard price is $0.006.Work in ProcessMaterials Usage VarianceThe receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.Materials InventoryMaterial Usage Variance
39 During the period the firm has 360 actual inspection hours, while the standard hours for the units produced is hours. The actual rate is $7.35 per hour while the standard rate is $7.00 per hour.Work in ProcessLabor Efficiency VarianceLabor Rate VarianceThe receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.Accrued PayrollLabor Variances
40 At the end of the year, the variances for materials and labor are usually closed to Cost of Goods Sold.Cost of Goods SoldMaterial Price VarianceLabor Efficiency VarianceLabor Rate VarianceThe receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.Closing Variances
41 At the end of the year, the variances for materials and labor are usually closed to Cost of Goods Sold.Material Usage VarianceCost of Goods SoldThe receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.Closing Variances