WEEK 2.  Define standard cost  Explain how standard are set  Compute the standard cost of actual or equivalent units produced  Compute standard cost.

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Presentation transcript:

WEEK 2

 Define standard cost  Explain how standard are set  Compute the standard cost of actual or equivalent units produced  Compute standard cost variances for materials, labor and FOH

Is the predetermined cost of manufacturing a single unit or a specific quantity of product under current or anticipated operating conditions ( Carter and Usry, 2002)

 Established budgets  Controlling costs by motivating employee and measuring operating efficiency  Simplifying costing procedures and expediting cost reports  Assigning cost to materials, work in progress and finished good in inventory  Establish contract bids and setting sales price

1. Material Standard and Variance: a. Material purchase price variance b. Material price usage variance c. Material inventory variance d. Material quantity (or usage) variance 2. Labor Standard and Variance a. Labor rate (wage or cost) variance b. Labor efficiency variance 3. Factory Overhead Standard and Variance a. Overall or net FOH Variance b. Two-variance method c. Three-variance method d. Four-variance method

a. Material purchase price variance = ( Qt x C.act ) – ( Qt x C. st ) or (C.act – C.st) Qt C.act > C.st = Unfavorable C.act < C.st = Favorable

b. Material price usage variance = ( Qt. used x C.act ) – ( Qt. used x C. st ) or (C.act – C.st) Qt.used C.act > C.st = Unfavorable C.act < C.st = Favorable

c. Material inventory variance = ( Qt. purchased x C.st ) – ( Qt. used x C. st ) or (Qt. purchased – Qt.used) C.st Qt. purchased > Qt. used = Unfavorable Qt. purchased < Qt. used = Favorable

d. Material quantity (or usage) variance = ( Qt. used x C.st ) – ( Qt. st x C. st ) or (Qt.used – Qt.st) C.st Qt. used > Qt. st = Unfavorable Qt. used < Qt. st = Favorable

a. Labor rate (wage or cost) variance = ( H. act x R. act ) - ( H. act x R. st ) or ( R.act – R.st) H.act R. act > R. st = Unfavorable R. act < R. st = Favorable

b. Labor efficiency variance = ( H. act x R. st ) – ( H. st x R. st ) or (H.act – H.st) R.st H. act > H. st = Unfavorable H. act < H. st = Favorable

a. Overall or net FOH Variance = FOH. act – FOH. st FOH. act > FOH. st = Unfavorable FOH. Act < FOH. st = Favorable

b. Two-variance method 1. Controllable Variance = FOH.act – ( FOH.var +FOH.fx) FOH.act > ( FOH.var +FOH.fx) = Unfavorable FOH.act < ( FOH.var +FOH.fx) = Favorable

2. Volume Variance = ( FOH.var +FOH.fx) – FOH.wip.st ( FOH.var +FOH.fx) > FOH.wip.st = UF ( FOH.var +FOH.fx) < FOH.wip.st = F Controllable variance + Volume variance = Overall or net FOH Variance

3. Three – variance Methods a. Spending Variance = FOH.act – (FOH.var1+FOH.fx) FOH.act > (FOH.var1+FOH.fx) = UF FOH.act < (FOH.var1+FOH.fx) = F Notes: FOH.var1 = on actual hours

b. Variable Efficiency Variance = (FOH.var1+FOH.fx) - ( FOH.var +FOH.fx) (FOH.var1+FOH.fx) > ( FOH.var +FOH.fx) = UF (FOH.var1+FOH.fx) < ( FOH.var +FOH.fx) = F

c. Volume Variance Spending var + Variable efficiency var + Volume var = Overall FOH variance

4. Four-Variance Method a. Fixed efficiency variance (H.act x FOH.fx.r) – (H.st x FOH.fx.r) (H.act x FOH.fx.r) > (H.st x FOH.fx.r)= UF (H.act x FOH.fx.r) < (H.st x FOH.fx.r) = F FOH.fx.r = Fixed FOH rate

b. Idle Capacity Variance = (FOH.var1+FOH.fx) – (H.act x FOH.r) (FOH.var1+FOH.fx) > (H.act x FOH.r) = UF (FOH.var1+FOH.fx) < (H.act x FOH.r) = F

c. Spending Variance d. Variable efficiency Variance Fixed Efficiency Var + Idle Cap Var + Spending Var + Variable eff.var = Overall FOH var

Carter,W & Usry, M, 2002, Cost Accounting, 13 th Edition, Thompson Learning