1. Principles of Accounting 2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
Multimedia Slides by:
Harry Hooper
Santa Fe Community College
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2. Chapter 25 Performance Measurement Using Standard Costing
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LEARNING OBJECTIVES
1. Define standard costs and describe how managers use standard costs in the management cycle.
2. Identify the six elements of, and compute, a standard unit cost.
3. Describe how to control costs through variance analysis.
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LEARNING OBJECTIVES
4. Compute and analyze direct materials variances.
5. Compute and analyze direct labor variances.
6. Define and prepare a flexible budget.
7. Compute and analyze manufacturing overhead variances.
8. Explain how variances are used to evaluate managers’ performance.
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5. Standard Costs in Today’s Business Environment
OBJECTIVE 1
Define standard costs and describe how managers use standard costs in the management cycle.
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Standard Costing
A budgeting control technique with 3 components:
A standard, predetermined performance level.
A measure of actual performance.
A measure of the variance, the difference, between the standard and the actual.
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Standard Costs
Standard costs are predetermined costs that are developed from analyses of both:
Past operating costs, quantities, and times.
Future costs and operating conditions.
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Standard Cost Flow
In a standard costing system, standard costs for direct materials, direct labor, and manufacturing overhead flow through the inventory accounts and eventually into the Cost of Goods Sold account.
The difference from normal costing systems is that under standard costing systems, standard costs instead of actual costs are used to record all of these flows.
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The Management Cycle
Managers use standard costs throughout the management cycle.
In the planning stage of the management cycle, standard costs aid in the development of budgets and as yardsticks for evaluating capital expenditures.
During the executing stage, standard costs, quantities, and times are applied to work performed.
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The Management Cycle
During the reviewing stage, actual costs are compared with standard costs to compute variances, and managers analyze the causes of those variances to improve operations. Both favorable and unfavorable variances should be investigated.
During the reporting stage, a variance report provides information on operations and managerial performance.
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11. Standard Costing, Variance Analysis, and the Management Cycle
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12. Standard Costing Systems
The primary difference between a standard costing system in service versus manufacturing organizations is that there are no direct materials variances in service organizations.
The importance of labor-related standards and variances has been reduced because direct labor costs as a proportion of product costs has decreased over time.
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The Management Cycle
In today’s globally competitive environment, new standards or measurements are necessary to help managers:
Reduce processing time.
Improve quality.
Improve customer satisfaction.
Improve on-time deliveries.
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Discussion
Q. What is the difference between a standard costing system in service versus manufacturing organizations?
A. The primary difference between a standard costing system in service versus manufacturing organizations is that there are no direct materials variances in service organizations.
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15. The Development of Standard Costs
OBJECTIVE 2
Identify the six elements of, and compute, a standard cost.
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16. A Standard Costing System
Standard costs replace actual costs in all accounts.
Materials Inventory, Work in Process, Finished Goods and Cost of Goods Sold balances are based on standard costs.
Separate records are kept of actual costs for comparison.
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Standard Cost per Unit
There are six standards used to determine the standard cost per unit:
Direct materials price standard.
Direct materials quantity standard.
Direct labor time standard.
Direct labor rate standard.
Standard variable manufacturing overhead rate.
Standard fixed manufacturing overhead rate.
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18. Direct Materials Price Standard
The direct materials price standard is calculated by carefully considering:
Expected price changes.
Changes in available quantities.
Possible new sources of supply.
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19. Direct Materials Quantity Standard
The direct materials quantity standard is affected by:
Product engineering specifications.
Quality of direct materials.
Age and productivity of machines.
Quality and experience of the work force.
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20. Direct Labor Time Standard
The direct labor time standard is based on:
Current time and motion studies of workers and machines.
Past performance.
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21. Direct Labor Rate Standard
The direct labor rate standards are affected by:
Labor union contracts.
Company personnel policies.
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22. Standard Direct Materials and Standard Direct Labor Costs
Standard direct materials cost =
Direct materials price standard x
Direct materials quantity standard
Standard direct labor cost =
Direct labor time standard x
Direct labor rate standard
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23. Standard Manufacturing Overhead Costs
(Standard variable overhead rate x
Variable overhead application basis)
+ (Standard fixed overhead rate x
Fixed overhead application basis)
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24. Standard Rates Total budgeted fixed manufacturing overhead costs
Standard variable manufacturing overhead rate =
Total budgeted variable manufacturing overhead costs
÷ Expected number of standard machine hours
Standard fixed manufacturing overhead rate =
Total budgeted fixed manufacturing overhead costs
÷ Normal capacity in terms of standard machine hours
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Standard Unit Cost
A product’s standard unit cost is determined by adding:
Standard direct materials cost.
Standard direct labor cost.
Standard manufacturing overhead cost.
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Discussion
Q. What are the six standards used in determining the standard cost per unit? A.
1. Direct materials price standard.
2. Direct materials quantity standard.
3. Direct labor time standard.
4. Direct labor rate standard.
5. Standard variable manufacturing overhead rate.
6. Standard fixed manufacturing overhead rate.
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27. Using Variance Analysis to Control Operations
OBJECTIVE 3
Describe how to control costs through variance analysis.
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28. Standard Costing Systems
A standard costing system has traditionally been associated with:
Cost control activities.
Evaluation of operating performance.
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29. Manufacturing Operations
Managers of manufacturing operations, as well as those responsible for selling and service functions, constantly compare the costs of what was expected to happen with the costs of what did happen.
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Variance Analysis
Variance analysis is a four-step approach.
Compute the variance.
If the variance is insignificant, actual operating results are close to or equal to anticipated operating conditions, no corrective action is needed.
Determine the cause of any significant variance.
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Variance Analysis
Identify and analyze the performance measures that track those activities.
Take action to correct the problem or continue to improve operations.
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32. Using Variance Analysis to Control Costs
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Discussion
Q. What are the four steps of variance analysis? A.
1. Compute the variance.
2. Determine the cause.
3. Identify the performance measures.
4. Take action to correct or continue.
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34. Direct Materials Variances
OBJECTIVE 4
Compute and analyze direct materials variances.
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Variance analysis need not be limited to the following 6 variances.
Companies may use dozens of variances for many different types of activities.
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36. Direct Materials Cost Variance
Direct materials cost variance is the sum of:
Direct materials price variance.
= (Standard Price - Actual Price) x Actual Quantity.
Direct materials quantity variance.
= (Standard Quantity - Actual Quantity) x Standard Price.
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37. Direct Materials Price Variance
Possible causes of a direct materials price variance are:
Changes in vendor prices.
Inaccurate or outdated direct materials price standards.
Differences between the quality of direct materials purchased and the quality desired.
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38. Direct Materials Price Variance
Differences between quantity discounts received and those anticipated.
The purchase of substitute direct materials that differ from product specifications.
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39. Direct Materials Quantity Variance
Possible causes of a direct materials quantity variance are:
Inaccurate or outdated direct materials quantity standards.
Poor workmanship or excellent workmanship.
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40. Direct Materials Quantity Variance
Faulty equipment.
Inferior or superior quality of direct materials.
Poor materials handling.
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41. Direct Materials Variance Analysis
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Discussion
Q. What are some possible causes of a direct materials quantity variance? A.
1. Inaccurate or outdated direct materials quantity standards.
2. Poor/excellent workmanship.
3. Faulty equipment.
4. Inferior/superior direct material quality.
5. Poor materials handling.
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43. Direct Labor Variances
OBJECTIVE 5
Compute and analyze direct labor variances.
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44. Direct Labor Cost Variance
Direct labor cost variance is the sum of:
Direct labor rate variance.
= (Standard Rate – Actual Rate) x Actual Quantity (hours)
Direct labor efficiency variance.
= Standard Rate x (Standard Hours Allowed – Actual Hours)
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45. Direct Labor Rate Variance
A direct labor rate variance can occur because:
A worker is hired at a pay rate that is higher or lower than expected.
An employee performed the duties of a higher- or lower-paid position.
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46. Direct Labor Rate Variance
Overall wage rates changed due to:
New labor agreements.
Labor strikes that cause the temporary hiring of unskilled help.
Large layoffs that result in unusual usage of remaining workers.
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47. Favorable Direct Labor Efficiency Variance
A favorable direct labor efficiency variance can be caused by:
Improved training of employees.
New machinery.
Higher quality of materials.
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48. Unfavorable Direct Labor Efficiency Variance
An unfavorable direct labor efficiency variance can be caused by:
Machine breakdowns.
Inferior direct materials.
Poor supervision.
Slow materials handling.
Poor employee performance.
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49. Direct Labor Variance Analysis
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Discussion
Q. What are the causes of favorable direct labor efficiency variance? A.
1. Improved training of employees.
2. New machinery.
3. Higher quality of materials.
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51. Manufacturing Overhead Variances
OBJECTIVE 6
Define and prepare a flexible budget.
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Flexible Budget
The budgets discussed earlier were static or fixed budgets, which forecast revenues and expenses for one level of sales and production.
A flexible budget is a summary of anticipated costs for a range of activity levels, geared to changes in productive output.
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53. Flexible Budget Formula
The flexible budget formula:
Includes a budgeted variable cost per unit, which is the same for all levels of output within the range chosen.
Includes a budgeted total fixed cost, which stays constant for the range.
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54. Flexible Budget Formula
Total budget costs =
(Variable cost per unit x
Number of units produced) +
Budgeted fixed costs
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Discussion
Q. What is the format of the flexible budget formula?
A. Total budget costs =
(Variable cost per unit x Number of units produced) +
Budgeted fixed costs.
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56. Analyzing Manufacturing Overhead Variances
OBJECTIVE 7
Compute and analyze manufacturing overhead variances.
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57. Manufacturing Overhead Variance
The total manufacturing overhead variance is equal to the difference between:
The actual manufacturing overhead costs incurred and
The standard manufacturing overhead costs applied to production.
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58. Total Manufacturing Overhead Variance
The total manufacturing overhead variance is then divided into two parts:
Controllable manufacturing overhead variance.
Manufacturing overhead volume variance.
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59. Controllable Manufacturing Overhead Variance
Is the difference between the actual manufacturing overhead costs incurred and the manufacturing overhead costs budgeted for the level of production achieved.
Can occur because too much or too little is spent on manufacturing overhead items such as indirect materials, indirect labor, supervision, or machine maintenance.
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60. Manufacturing Overhead Variance Analysis
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61. Manufacturing Overhead Volume Variance
Is the difference between the manufacturing overhead budgeted for the level of production achieved and the total manufacturing overhead costs applied to production using the standard variable and fixed manufacturing overhead rates.
Will occur if more or less capacity than normal is used.
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Discussion Q.
If machine operators were inefficient and took longer to perform their work than expected, what would be the resulting controllable variance?
If less fixed manufacturing overhead was applied than expected, what would be the resulting volume variance? A.
Unfavorable
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63. Using Variances in Performance Evaluation
OBJECTIVE 8
Explain how variances are used to evaluate managers’ performance.
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64. Management Evaluation
The effective evaluation of managers’ performance depends on both human factors and company policies.
To ensure effectiveness and fairness when establishing a performance evaluation process, management should develop appropriate policies and seek input from managers and employees.
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65. Policies and Procedures
Policies and procedures should address:
Preparing operational plans.
Assigning responsibility for performance.
Communicating operational plans to key personnel.
Evaluating each area of responsibility.
Identifying causes of significant variances.
Taking corrective action to eliminate problems.
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Performance Reports
The keys to preparing a performance report are to:
Identify the personnel responsible for each variance.
Determine the causes for each significant variance.
Develop a reporting format suited to the task.
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Performance Reports
The management accountant should tailor performance to each manager’s responsibilities so that each report contains those cost items controllable by that manager.
Managers should be held accountable for only those cost areas under their control.
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Discussion
Q. The effective evaluation of managers’ performance depends on what two things? A.
1. Human factors.
2. Company policies.
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OK, LET’S REVIEW . . .
1. Define standard costs and describe how managers use standard costs in the management cycle.
2. State the purposes for using standard costs.
3. Identify the six elements of, and compute, a standard unit cost.
4. Describe how to control costs through variance analysis.
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AND FINALLY . . .
5. Compute and analyze direct materials variances.
6. Compute and analyze direct labor variances.
7. Define and prepare a flexible budget.
8. Compute and analyze manufacturing overhead variances.
9. Explain how variances are used to evaluate managers’ performance.
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