1. 9-1 Standard Costing: A Functional-Based Control Approach 9

2. 9-2 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 X Standard Quantity (SP X SP) 1

3. 9-3 Developing Unit Input 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. Kaizen standards reflect a planned improvement and are a type of currently attainable standard. 1

4. 9-4 Variance Analysis and Accounting: Direct Materials and Direct Labor A flexible budget can be 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 cost = (AP X AQ) – (SP X SQ) 3

5. 9-5 Variance Analysis and Accounting: Direct Materials and Direct Labor 3 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 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

6. 9-6 Variance Analysis and Accounting: Direct Materials and Direct Labor 3 Direct Materials Price Variance: 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 X AQ) – (SP X 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

7. 9-7 Variance Analysis and Accounting: Direct Materials and Direct Labor 3 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 X AQ) – (SP X 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

8. 9-8 Variance Analysis and Accounting: Direct Materials and Direct Labor 3 Timing of the Price Variance Computation The direct materials price variance can be computed at one of two points: 1) When the direct materials are issued for use in production 2) When they are purchased

9. 9-9 Variance Analysis and Accounting: Direct Materials and Direct Labor Accounting for the Direct Materials Price and Usage Variances Materials (SP X AQ) Direct Materials Price Variance (AP –SP)AQ Accounts Payable (AP X AQ) Work in Process (SQ X SP) Direct Materials Usage Variance (AQ-AQ)SP Materials (AQ X SP) 3

10. 9-10 Variance Analysis and Accounting: Direct Materials and Direct Labor Direct Labor Rate Variance computes the difference between what was paid to direct laborers and what should have been paid LRV = (AR X AH) – (SR X AH) Direct Labor Efficiency variance measures the difference between the direct labor hours that were actually used and the direct labor hours that should have been used LEV = (AH X SR) – (SH X SR) 3

11. 9-11 Variance Analysis and Accounting: Direct Materials and Direct Labor Accounting for the Direct Labor Rate and Efficiency Variance (assuming a favorable direct labor rate variance and an unfavorable labor efficiency variance) Work in Process (SH X SR) Direct Labor Efficiency Variance (AH –SH)SR Direct Labor Rate Variance (AH – SR) AH Wages Payable (AH X AR) 3

12. 1-12 Variance Analysis and Accounting: Direct Materials and Direct Labor Investigating Direct Materials and Labor Variances: Because 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 upper control limit is the standard plus the allowable deviation and the lower control limit is the standard minus the allowable deviation. 3

13. 9-13 Variance Analysis: Overhead Costs Variable overhead spending variance measures the aggregate effect of differences in the actual variable overhead rate and the standard variable overhead rate VOSV = (AVOR X AH) – (SVOR X 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 Variable overhead efficiency variance measures the change in variable overhead consumption that occur because of the efficient/inefficient use of direct labor VOEV = (SVOR X AH) – (SVOR X SH) 4

14. 9-14 Variance Analysis: Overhead Costs Fixed overhead spending variance is the difference between the actual fixed overhead and the budgeted fixed overhead FOSV = AFOH – BFOH If less (more) is spent on fixed overhead items than was budgeted, the spending variance is favorable (unfavorable). Fixed overhead volume variance is the difference between budgeted fixed overhead and applied fixed overhead Volume variance = Budgeted fixed overhead – Applied fixed overhead As a general rule, 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 4

15. 9-15 Variance Analysis: Overhead Costs Accounting for Overhead Variances: To Recognize the incurrence of actual overhead: Variable Overhead Control Fixed Overhead Control Miscellaneous Accounts 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 4

16. 9-16 Variance Analysis: Overhead Costs Accounting for Overhead Variances (continued): To close the variances to Cost of Goods Sold: Fixed Overhead Volume Variance Variable Overhead Spending Variance Cost of Goods Sold Variable Overhead Efficiency Variance Fixed Overhead Spending Variance 4

17. 9-17 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. 5 Mix Variance =

18. 9-18 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 X total actual inputs Yield ratio = total output/total input SPy = Standard cost of the yield (Similar equations for labor) 5