Chapter 10: Standard Costing and Performance Measures for Today’s Manufacturing Environment Standard Costing Direct-material price and quantity variances.

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Presentation transcript:

Chapter 10: Standard Costing and Performance Measures for Today’s Manufacturing Environment Standard Costing Direct-material price and quantity variances Material purchase price variances and material usage variances Direct-labor rate and efficiency variances Problems

Standard Costing and Variances Standard Costing:a predetermined cost for the production of goods or services, which serve as a benchmark against which to compare the actual cost. Cost Variance:difference between actual and standard cost. Favorable Variance:when the variance between standard and actual costs are good for the company. Unfavorable Variance:when the variance between standard and actual costs are not good for the company. Variance Analysis:1- from a product costing perspective, to understand what is causing the variances. 2- from a managerial control and responsibility perspective to provide the proper incentive for managers

Standard Costing and Variances Standard Directtotal amount of material normally required Material Quantity:to produce a finished product (including allowances for waste and inefficiency. Standard Directtotal delivered cost, after subtracting any Material Price:purchase discounts. Standard Directnumber of hours normally needed to Labor Quantity:manufacture one unit or product Standard Directtotal hourly cost of compensation, including Labor Rate:fringe benefits.

Standard Costing and Variances: Definitions Variables SP = Standard price of input SQ = Standard quantity input units/outputs (e.g. four tires/car) SQA = Standard quantity allowed for acutal units produced (SQ*units produced) AQP = Actual quantity purchased AQU =Actual quantity used (produced) AP = Actual price Direct Material Price Variance = (AP-SP) * AQP Direct Material Quantity Variance = (AQU-SQA)*SP Direct Materials Budget Variance = Price variance - Quantity Variance (These formulas apply similarly for direct labor)

Variance Analysis for Managerial Control Total Costs are broken down for Analysis Direct Materials Direct Labor Variable Overhead Fixed Overhead