1. 9-1 Standard Costing: A Functional- Based Control Approach Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University

2. 9-2 1.Describe how unit input standards are developed, and explain why standard cost 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. 4.Compute overhead variances three different ways, and explain overhead accounting. ObjectivesObjectives After studying this chapter, you should be able to: ContinuedContinued

3. 9-3 5.Calculate mix and yield variances for direct materials and direct labor. ObjectivesObjectives

4. 9-4 Unit Standard Cost To determine the unit standard cost for a particular input, two decisions must be made: 1.How much of the input should be used per unit of output (quantity decision)? 2.How much should be paid for the quantity of the input to be used (pricing decision)?

5. 9-5  Historical experience  Engineering studies  Input from operating personnel Sources for Setting Standards

6. 9-6 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. Establishing Standards

7. 9-7  To Improve Planning and Control  To Facilitate Product Costing Purpose of Standards

8. 9-8 Cost Assignment Approaches Actual costing systemActualActualActual Normal costing systemActualActualBudgeted Standard costing systemStandardStandardStandard Manufacturing Costs Direct Direct Direct Direct Materials Labor Overhead Materials Labor Overhead

9. 9-9

10. 9-10 Standard Cost Sheet Deluxe Strawberry Frozen Yogurt Standard Standard Standard Standard Standard Standard Description Price Usage Cost Subtotal Description Price Usage Cost Subtotal Direct materials: Yogurt$0.020x25 oz.=$0.50 Strawberries0.010x10 oz.= 0.10 Milk0.015x8 oz.=0.12 Whipped cream0.025x4 oz.=0.10 Gelatin0.010x1 oz. =0.01 Container0.030x1= 0.03 Total direct materials$0.86 Continued

11. 9-11 Standard Standard Standard Standard Standard Standard Description Price Usage Cost Subtotal Description Price Usage Cost Subtotal Direct labor: Machine operators$8.00x0.01 hr.=$0.08 Total direct labor$0.08 Overhead: Variable overhead6.00x 0.01 hr.=$0.06 Fixed overhead20.00x0.01 hr.= 0.20 Total overhead 0.26 Total standard unit cost$1.20

12. 9-12 Standard Usage Allowed Standard Quantity (SQ) of Materials Allowed for 20,000 quarts: SQ = Unit quantity standard x Actual output = 25 x 20,000 = 500,000 ounces Standard Hours (SH) of Labor Allowed for 20,000 quarts: SH = Unit quantity standard x Actual output = 0.01 x 20,000 = 200 direct labor hours

13. 9-13 Price and Usage Variances Actual production: 30,000 quarts Actual yogurt usage: 780,000 ounces Actual price per ounce of yogurt: $0.025 Actual direct labor hours: 325 hours Actual wage rate: $8.20 per hour

14. 9-14 Price and Usage Variances AP x AQ (Actual Quantity at Actual Price) (1) SP x AQ (Actual Quantity at Standard Price) (2) SP x SQ (Standard Quantity at Standard Price) (3) Price Variance (1) –(2) Usage Variance (2) – (3) Total Variance (1) – (3)

15. 9-15 MPV = (AP – SP)AQ Material Price Variance Actual price per unit Standard price per unit Actual quantity of direct material used

16. 9-16 MPV = (AP – SP)AQ Material Price Variance = ($0.025 – $0.020)780,000 = $0.005 x 780,000 = $3,900 U

17. 9-17 Direct Materials Usage Variance MUV = (AQ – SQ)SP Actual quantity of materials used Standard quantity of materials allowed for the actual output Standard price per unit

18. 9-18 MUV = (AQ – SQ)SP = (780,000 – 750,000)$0.02 = 30,000 x $0.02 = $600 U Direct Materials Usage Variance

19. 9-19 The actual price is $0.025 per ounce while the standard price is $0.020 and 780,000 ounces are purchased. Helado Company would make the following entry: The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Materials 15 600 00 Direct Materials Price Variance3 900 00 Material Price Variance Accounts Payable 19 500 00

20. 9-20 The entry to record Helado’s usage of 780,000 ounces of yogurt during the first week of May would be: The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process 15 000 00 Direct Materials Usage Variance 600 00 Material Usage Variance Materials 15 600 00

21. 9-21 Rate and Efficiency Variances AH x AR (Actual Hours at Actual Rate) (1) AH x SR (Actual Hours at Standard Rate) (2) SH x SR (Standard Hours at Standard Rate) (3) Rate Variance (1) –(2) Efficiency Variance (2) – (3) Total Variance (1) – (3)

22. 9-22 LRV = (AR – SR)AH Actual hourly wage rate Standard hourly wage rate Actual direct labor hours used Labor Rate Variances Labor Rate Variances

23. 9-23 Labor Rate Variances Labor Rate Variances LRV = (AR – SR)AH = ($8.20 – $8.00)325 = $0.20 x 325 = $65 U

24. 9-24 LEV = (AH – SH)SR Actual direct labor hours used Standard direct labor hours that should have been used Standard hourly wage rate Labor Efficiency Variances Labor Efficiency Variances

25. 9-25 Labor Efficiency Variances Labor Efficiency Variances LEV = (AH – SH)SR = (325 – 300)$8.00 = 25 x $8.00 = $200 U

26. 9-26 During the period Helado Company uses 325 actual direct labor hours, while the standard hours for the units produced is 300 hours. The actual rate incurred is $8.20 per hour while the standard rate is $8.00 per hour. The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process 2 400 00 Direct Labor Rate Variance65 00 Direct Labor Efficiency Variance200 00 Labor Variances Wages Payable 2 665 00

27. 9-27 Disposition of Direct Materials and Direct Labor Variances The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Cost of Goods Sold 4 765 00 Direct Materials Price Variance3 900 00 Direct Materials Usage Variance600 00 Direct Labor Rate Variance65 00 Direct Labor Efficiency Variance200 00 If immaterial in amount

28. 9-28 Disposition of Direct Materials and Direct Labor Variances If material in amount Prime Costs Percentage of Total Work in Process$ 00% Finished Goods3,48020 Cost of Goods Sold 13,920 80 Total$17,400100%

29. 9-29 Disposition of Direct Materials and Direct Labor Variances The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Cost of Goods Sold 3 812 00 Direct Materials Price Variance3 900 00 Direct Materials Usage Variance600 00 Direct Labor Rate Variance65 00 Direct Labor Efficiency Variance200 00 If material in amount Finished Goods953 00

30. 9-30 Variable Overhead Variances Variable overhead rate (standard)$6.00/DLH Actual variable overhead costs$7,540 Actual hours worked 1,300 Quarts of deluxe frozen strawberry yogurt produced120,000 Hours allowed for production1,200 Applied variable overhead$7,200

31. 9-31 Variable Overhead Variances Actual Variable Overhead (1) Variable Overhead Rate x Actual Hours (2) Variable Overhead Rate x Standard Hours (3) Spending Variance (1) –(2) Efficiency Variance (2) – (3) Total Variance (1) – (3)

32. 9-32 VOSV = (AVOR x AH) – (SVOR x AH) Variable Overhead Spending Variances = (AVOR – SVOR)AH = ($5.80 – $6.00)1,300 = $260 F

33. 9-33 VOSV = (AH – SH)SVOR Variable Overhead Efficiency Variances = (1,300 – 1,200)$6.00 = $600 U

34. 9-34 Helado Company, Inc. Flexible Budget Performance Report For the Month Ended May 31, 2004 Cost Formula Actual Costs Budget Spending Variance Natural gas$3.80$4,400$4,940$540 F Electricity2.002,8402,600240 U Water 0.20 300 260 40 U Total cost$6.00$7,540$7,800$240 F

35. 9-35 Helado Company, Inc. Performance Report For the Month Ended May 31, 2004 Cost Formula Actual Costs Budget for Actual Hours Spending Variance Natural gas$3.80$4,400$4,940$540 F Electricity2.002,8402,600240 U Water 0.20 300 260 40 U Total $6.00$7,540$7,800$260 F Budget for Standard Hours Efficiency Variance $4,560$380 U 2,400200 U 240 20 U $7,200$600 U

36. 9-36 Fixed Overhead Variances Budgeted fixed overhead$20,000 Expected activity1,000 direct labor hours Standard fixed overhead rate $20 Hours allowed to produce 100,000 quarts of frozen yogurt (0.01 x 100,000) Budgeted or Planned Items (May) Actual Results Actual production120,000 quarts Actual fixed overhead cost$20,500 Standard hours allowed for actual production (0.01 x 120,000)1,200

37. 9-37 Total Fixed Overhead Variances Applied fixed overhead Standard fixed overhead rate x Standard hours = = $20 x 1,200 =$24,000 Total fixed overhead variance $20,500 – $24,000 = = $3,500 Overapplied

38. 9-38 Fixed Overhead Variances Actual Fixed Overhead (1) Budgeted Fixed Overhead (2) Fixed Overhead Rate x Standard Hours (3) Spending Variance (1) – (2) Volume Variance (2) – (3) Total Variance (1) – (3)

39. 9-39 Fixed Overhead Spending Variance FOSV = AFOH – BFOH = $20,500 – $20,000 = $500 U

40. 9-40 Helado Company, Inc. Performance Report For the Month Ended May 31, 2004 Actual Cost Budgeted Cost Variance Depreciation$ 5,000$ 5,000 $---- Salaries13,40013,000400 U Taxes1,1001,05050 U Insurance 1,000 950 50 U Total $20,500$20,000$500 U Fixed Overhead Items

41. 9-41 Fixed Overhead Volume Variance FOVV = Budgeted fixed overhead – Applied fixed overhead = $20(1,000 – 1,200) = $4,000 F = [Standard fixed overhead rate x SH(D)] – (Standard fixed overhead x SH)

42. 9-42 To assign overhead to production, the following entry is made: The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Work in Process31 200 00 Variable Overhead Control7 200 00 Fixed Overhead Control24 000 00 To recognize the incurrence of actual overhead, the following entry is needed: The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment. Variance Overhead Control7 540 00 Fixed Overhead Control20 500 00 Miscellaneous Accounts28 040 00

43. 9-43 MIX AND YIELD VARIANCES: MATERIAL AND LABOR Standard Mix Information: Direct Materials Direct Material Mix Mix Proportion SP Standard Cost Peanuts128 lbs.0.80$0.50$64 Almonds 32 lbs.0.201.00 32 Total160 lbs.$96 Yield120 lbs. Yield ratio: 0.75 (1.20/160) Standard cost of yield (SP): $0.80 per pound ($96/120 pounds of yield)

44. 9-44 Malcom Nut Company produces a batch of 1,600 pounds and produces the following actual results: Direct Material Actual Mix Percentages Peanuts1,120lbs.70% Almonds 480 30 Total1,600lbs.100% Yield1,300lbs.81.3%

45. 9-45 SM = Standard mix proportion x Total actual input quantity SM(peanuts) = 0.80 x 1,600 pounds = 1,280 pounds SM(almonds) = 0.20 x 1,600 pounds = 320 pounds Standard Mix

46. 9-46 Mix Variance = 3(AQ – SM)SP Direct Material AQ SM AQ – SM SP (AQ – SM)SP Peanuts1,1201,280-160$0.50$-80 Almonds4803201601.00 60 Mix variance$-80U Standard Mix

47. 9-47 Standard yield = Yield ratio x Total actual inputs Direct Materials Yield Variance Yield variance = (Standard yield – Actual yield)SP y Yield variance = (1,200 – 1,300)$0.80 = $80 F

48. 9-48 Standard Mix Information Labor Type Mix Mix Proportion SP Standard Cost Shelling3hrs.0.60$ 8.00$24 Mixing2hrs.0.4015.00 30 Total5hrs.$54 Yield120lbs. Yield ratio: 24 = (120/5), or 2,400% Standard cost of yield (SP ): $0.45 per pound ($54/120 pounds of yield) y

49. 9-49 Malcom processes 1,600 pounds of nuts and produces the following actual results: Shelling20 hrs.40% Mixing30 hrs. 60% Total50 hrs.100% Yield1,300 lbs.2,600% *Uses 50 hours as the base. Standard Mix Information Labor TypeActual MixMix Percentages*

50. 9-50 Labor Type AH SM AH – SM SP (AH – SM)/SP Shelling2030-10$ 8.00$-80 Mixing302010 15.00 150 Direct Labor mix variance$-70U Direct Labor Mix Variance

51. 9-51 Using the standard mix information and the actual results, the yield variance is computed as follows: Yield variance = (Standard yield – Actual yield)SP = [(24 x 50) – 1,300]$0.45 = (1,200 – 1,300)$0.45 = $45 F The yield variance is favorable because the actual yield is greater than the standard yield. Direct Labor Yield Variance y

52. 9-52 Chapter End of

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