© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. STANDARD COSTING: A FUNCTIONAL-BASED CONTROL APPROACH CHAPTER 9

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 9 OBJECTIVES 1.Describe how unit input standards are developed, and explain why standard costing systems are adopted 2.Explain the purpose of a standard cost sheet 3.Compute and journalize the direct materials and direct labor variances, and explain how they are used for control

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 9 OBJECTIVES 4.Compute overhead variances three different ways, and explain overhead accounting 5.Calculate mix and yield variances for direct materials and direct labor

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. DEVELOPING UNIT INPUT STANDARDS Price Standards specify how much should be paid for the quantity of the input to be used Quantity standards specify how much of the input should be used per unit of output Unit standard cost is the product of these two standards Standard price × Standard Quantity (SP × SP) LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. DEVELOPING UNIT INPUT STANDARDS Establishing Standards Ideal Standards demand maximum efficiency and can be achieved only if everything operates perfectly Currently attainable standards can be achieved under efficient operating conditions LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. DEVELOPING UNIT INPUT STANDARDS Kaizen Standards Continuous improvement standards Reflect planned improvement and are a type of currently attainable standard Have a cost reduction focus and because of their emphasis on continuous improvement, are constantly changing LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. DEVELOPING UNIT INPUT STANDARDS Kaizen Standards Standards and Activity-Based Costing An activity’s cost is determined by the amount of resources consumed by each activity Standard consumption patterns are identified based on historical experience Activity-based systems also use standards for control, where control is specifically defined as cost reduction Activities are classified as either value-added or non- value-added LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. DEVELOPING UNIT INPUT STANDARDS Usage of Standard Costing Systems Cost Management Planning and Control Decision Making and Product Costing LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.1—COST ASSIGNMENT APPROACHES LO-1

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.2—STANDARD COST SHEET FOR DELUXE STRAWBERRY FROZEN YOGURT LO-2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. STANDARD COST SHEETS Standard costs are developed for direct materials, direct labor, and overhead used in producing a product or service Total of these standard costs yields the standard cost per unit Standard cost sheet provides the detail underlying the standard unit cost LO-2

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Flexible budget : used to identify the direct material or direct labor input costs that should have been incurred for the actual level of activity Total budget variance: the difference between the actual cost of the input and its standard cost Total budget variance = (AP × AQ) – (SP × SQ) LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance Price (rate) variance: difference between the actual and standard unit prices of an input multiplied by the actual quantity of inputs Usage (efficiency) variance: difference between the actual and standard quantity of inputs multiplied by the standard unit price of the input LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance Unfavorable (U) variance: occurs whenever actual prices or usage of inputs are greater than standard prices or usage Favorable (F) variance: occurs whenever actual prices or usage of inputs are less than standard prices or usage LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance Direct materials price variance (MPV) : difference between what was actually paid for direct materials and what would have been paid for the actual quantity bought if it had been bought at the standard price MPV = (AP × AQ) – (SP × AQ) LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance MPV = (AP – SP)AQ if the actual price is greater than standard, the MPV is unfavorable if the actual price is less than the standard price, the MPV is favorable LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance Direct materials usage variance : the difference between the amount of materials actually used and what should have been used for the actual quantity of units produced multiplied by the standard price MUV = (SP × AQ) – (SP × SQ) LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating the Direct Materials Price Variance and Direct Materials Usage Variance MUV = (AQ – SP)SQ if the actual quantity is greater than standard, the MUV is unfavorable if the actual quantity is less than the standard quantity, the MUV is favorable LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Timing of the Price Variance Computation The direct materials price variance can be computed at one of two points When the direct materials are issued for use in production When they are purchased LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Timing of the Direct Materials Usage Variance Computation Direct materials usage variance should be computed as direct materials are issued for production To facilitate this process, many companies use three forms Standard bill of materials Color-coded excessive usage forms Color-coded returned-materials forms LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT STANDARD BILL OF MATERIALS LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Accounting for the Direct Materials Price and Usage Variances In a standard costing system, all inventories are carried at standard Direct materials price variance is computed at the point of purchase Unfavorable variances are always debits, and favorable variances are always credits LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Accounting for the Direct Materials Price and Usage Variances Purchase of direct materials, assuming an unfavorable MPV and that AQ is defined as direct materials purchased Materials (SP × AQ) Direct Materials Price Variance (AP –SP)AQ Accounts Payable (AP × AQ) LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Accounting for the Direct Materials Price and Usage Variances Issuance and usage of direct materials, assuming an unfavorable MUV Work in Process (SQ × SP) Direct Materials Usage Variance (AQ-AQ)SP Materials (AQ × SP) LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Calculating Direct Labor Variances The rate (price) and efficiency (usage) variances for direct labor can be calculated using either the graphical, three-pronged approach or a formula approach LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Direct Labor Rate and Efficiency Variances: Formula Approach Direct labor rate variance (LRV) computes the difference between what was paid to direct laborers and what should have been paid LRV = (AR × AH) – (SR × AH) OR (AR – SR)AH where AR = Actual hourly wage rate SR = Standard hourly wage rate AH = Actual direct labor hours used LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Direct Labor Rate and Efficiency Variances: Formula Approach Direct labor efficiency variance (LEV) measures the difference between the direct labor hours that were actually used and the direct labor hours that should have been used LEV = (AH × SR) – (SH × SR) or (AH – SH)SR where AH = Actual direct labor hours used SH = Standard direct labor hours that should have been used SR = Standard hourly wage rate LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Accounting for the Direct Labor Rate and Efficiency Variance Assume a favorable direct labor rate variance and an unfavorable labor efficiency variance Work in Process (SH × SR) Direct Labor Efficiency Variance (AH –SH)SR Direct Labor Rate Variance (AH – SR) AH Wages Payable (AH × AR) LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Investigating Direct Materials and Labor Variances As random variations around the standard are expected, management should establish an acceptable range of performance The acceptable range is the standard, plus or minus one allowable deviation The top and bottom measures of the allowable range are called the control limits The upper control limit is the standard plus the allowable deviation and the lower control limit is the standard minus the allowable deviation LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR Disposition of Direct Materials and Direct Labor Variances All variances are closed out at the end of the year Immaterial variances are closed to Cost of Goods Sold Materials variances are prorated among Work in Process, Finished Goods, and Cost of Goods Sold LO-3

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Four-Variance Method for Calculating Overhead Variances Calculates two variances for variable overhead and two variances for fixed overhead Total variable overhead variance is divided into two components: the variable overhead spending variance and the variable overhead efficiency variance The total fixed overhead variance is divided into two components: the fixed overhead spending variance and the fixed overhead volume variance LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Variable Overhead Spending Variance Measures the aggregate effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR) VOSV = (AVOR × AH) – (SVOR × AH) Variable overhead is assumed to vary as the production volume changes – variable overhead changes in proportion to changes in the direct labor hours used LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Variable Overhead Efficiency Variance Measures the change in variable overhead consumption that occur because of the efficient/inefficient use of direct labor VOEV = (SVOR × AH) – (SVOR × SH) LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.4—VARIABLE OVERHEAD SPENDING VARIANCE BY ITEM LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.5—VARIABLE OVERHEAD SPENDING AND EFFICIENCY VARIANCES BY ITEM LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Fixed Overhead Spending Variance Difference between the actual fixed overhead and the budgeted fixed overhead FOSV=AFOH − BFOH AFOH = Actual fixed overhead BFOH = Budgeted fixed overhead If less (more) is spent on fixed overhead items than was budgeted, the spending variance is favorable (unfavorable) LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Fixed Overhead Volume Variance Difference between budgeted fixed overhead and applied fixed overhead Volume variance = Budgeted fixed overhead – Applied fixed overhead LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Fixed Overhead Volume Variance If actual production is less than budgeted production, the volume variance will be unfavorable If actual production is more than budgeted production, the volume variance will be favorable The difference is due solely to the differences in production or planned utilization of capacity LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.6—FIXED OVERHEAD SPENDING VARIANCE BY ITEM LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Accounting for Overhead Variances To assign overhead to production Work in Process Variable Overhead Control Fixed Overhead Control LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Accounting for Overhead Variances To recognize the incurrence of actual overhead Variable Overhead Control Fixed Overhead Control Various Accounts LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Accounting for Overhead Variances To recognize the variances Fixed Overhead Control Variable Overhead Efficiency Variance Fixed Overhead Spending Variance Variable Overhead Control Variable Overhead Spending Variance Fixed Overhead Volume Variance LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. VARIANCE ANALYSIS: OVERHEAD COSTS Accounting for Overhead Variances To close the variances to Cost of Goods Sold Fixed Overhead Volume Variance Cost of Goods Sold Variable Overhead Spending Variance Variable Overhead Efficiency Variance Fixed Overhead Spending Variance LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.7—TWO-VARIANCE ANALYSIS: HELADO COMPANY LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 9.8—THREE-VARIANCE ANALYSIS: HELADO COMPANY LO-4

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MIX AND YIELD VARIANCES: MATERIALS AND LABOR Mix variance: created whenever the actual mix of inputs differs from the standard mix Yield variance: occurs whenever the actual yield (output) differs from the standard yield LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MIX AND YIELD VARIANCES: MATERIALS AND LABOR Direct Materials Mix Variance Difference in the standard cost of the actual mix of inputs use and the standard cost of the mix of inputs that should have been used If relatively more of a more expensive input is used, the mix variance will be unfavorable If relatively more of a less expensive input is used, the mix variance will be favorable. LO-5 Mix Variance =

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. MIX AND YIELD VARIANCES: MATERIALS AND LABOR Direct Materials Yield Variance Designed to show the extent to which the amount of input resulted in the expected amount of output Yield variance = (Standard yield – Actual yield) Spy where Standard yield = yield ratio × total actual inputs Yield ratio = total output/total input SPy = Standard cost of the yield LO-5

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. END OF CHAPTER 9