1. Standard Costing: A Managerial Control Tool
CHAPTER

2. After studying this chapter, you should be able to:
Objectives
1. Tell how unit standards are set and why standard costing systems are adapted.
2. State the purpose of a standard cost sheet.
3. Describe the basic concepts underlying variance analysis, and explain when variances should be investigated.
4. Compute the material and labor variances, and explain how they are used for control.
After studying this chapter, you should be able to:
Continued

3. Objectives
5. Calculate the variable and fixed overhead variances, and give their definitions.
6. Appendix: Prepare journal entries for materials and labor variances, and show how to account for overhead variances.

4. Cost control often means the difference between success and failure.

5. Why Standard Cost Systems Are Adopted
Standard costing systems enhance planning and control and improve performance measurement.
Standard costing systems facilitate product costing.

6. Cost Assignment Approaches
Manufacturing Costs
Direct Direct
Materials Labor Overhead
Actual costing system Actual Actual Actual
Normal costing system Actual Actual Budgeted
Standard costing system Standard Standard Standard

7. Standard Cost Sheet for Corn Chips
Standard Standard Standard
Price Usage Cost Subtotal
Description
Direct materials:
Yellow corn $ oz. $0.108
Cooking oil oz
Salt oz
Lime oz
Bags bag
Total direct materials $0.223

8. Standard Cost Sheet for Corn Chips
Standard Standard Standard
Price Usage Cost Subtotal
Description
Direct materials $0.223
Direct labor:
Inspectors $ hr. $0.049
Machine operators hr
Total direct labor
Overhead:
Variable overhead hr. $0.030
Fixed overhead hr
Total overhead
Total standard unit cost $0.560

9. The standard quantity of yellow corn meal per package is 18 ounces.
During the first week of March, 100,000 packages of corn chips are produced.
The standard quantity of yellow corn meal per package is 18 ounces.

10. Standard Quantity of Materials Allowed Standard Hours Allowed
SQ = Unit quantity standard x Actual output
= 18 x 100,000
= 1,800,000 ounces
Standard Hours Allowed
SH = Unit labor standard x Actual output
= x 100,000
= 80 direct labor hours

11. Total variance = Price variance + Usage variance
= (AP – SP)AQ + (AQ – SQ)SP
= [(AP x AQ) – (SP x AQ)]
+ [(SP x AQ) – (SP x SQ)]
= (AP x AQ) – (SP x AQ)]
+ (SP x AQ) – (SP x SQ)
= (AP x AQ) – (SP x SQ)

12. Variance Analysis: General Description
1. AP x AQ (Actual Quantity of Input at Actual Price)
2. SP x AQ (Actual Quantity of Input at Standard Price)
3. SP x SQ (Standard Quantity of Input at Standard Price)
Price Variance (1-2)
Usage Variance (2-3)
Budget Variance (1-3)

13. Favorable variances occur whenever the opposite occurs.
Unfavorable variances occur whenever actual prices or usage of inputs are greater than standard prices or usage.
Favorable variances occur whenever the opposite occurs.

14. Control Chart
Cost x
$110,000
$100,000
$ 90,000
Time

15. Variance Analysis: Materials and Labor
Actual production 48,500 bags of corn chips
Actual cost of corn 780,000 ounces of $ = $5,382
Actual cost of inspection labor 360 hours at $7.35 = $2,646
Actual Costs Budgeted Costs Total Variance
Corn $5, $5, $ U
Inspection labor 2, , U

16. Variance Analysis: Columnar Approach
AQ x AP 780,000 x $5,382
AQ x SP
780,000 x $
$4,680
SQ x SP
873,000 x $0.0060
$5,238
$702 U
Price Variance
$558 F
Usage Variance
$144 U
Total Variance

17. MPV = (AP – SP)AQ Material Price Variance The actual price per unit
The standard price per unit
The actual quantity of material used

18. Material Price Variance
MPV = (AP – SP)AQ
= ($ – $0.0060)780,000
= $ x 780,000
= $702 U
Percent of SP x SQ = $702/$4,680 = 15%

19. MUV = (AQ – SQ)SP Direct Materials Usage Variance
The actual quantity of materials used
The standard quantity of materials allowed for the actual output
The standard price per unit

20. Direct Materials Usage Variance
MUV = (AQ – SQ)SP
= (780,000 – 873,000)($0.006)
= 93,000 x $0.006
= $558 F
Percent of SQ x SP = $558/$5,238 = 10.7%

21. LRV = (AR – SR)AH Labor Rate Variances The actual hourly wage rate
The standard hourly wage rate
The actual direct labor hours used

22. Percent of SR x SH = $126/$2,520 = 5%
Labor Rate Variances
LRV = (AR – SR)AH
= ($7.35 – $7.00)360
= $0.35 x 360
= $126 U
Percent of SR x SH = $126/$2,520 = 5%

23. Labor Variances: Columnar Approach
AH x AR
360 x $735
$2,646
AH x SR
360 x $7.00
$2,520
SH x SR
339.5 x $7.00
$2,376.50
$126 U
Rate Variance
$ U
Efficiency Variance
$ U
Total Variance

24. LEV = (AH – SH) SR Labor Efficiency Variances
The actual direct labor hours used
The standard direct labor hours that should have been used
The standard hourly wage rate

25. Percent of SH x SR = $143.50/$2,376.50 = 6%
Labor Efficiency Variances
LEV = (AH – SH)SR
= (360 – 339.5)$7
= 20.5 x $7
= $ U
Percent of SH x SR = $143.50/$2, = 6%

26. Variable Overhead Variances
Variable overhead rate (standard) $3.85/DLH
Actual variable overhead costs $1,600 Actual hours worked 400
Bags of chips produced 48,500
Hours allowed for production 373.3
Applied variable overhead $1,456

27. Variable Overhead Variances: Columnar Approach
Actual VO
$1,600
VO Rate x Actual Hours
$1,540
VO Rate x Standard Hours
$1,456
$60 U
Spending Variance
$84 U
Efficiency Variance
$144 U
Total Variance

28. VOSV = (AVOR x AH) – (SVOR x AH)
Variable Overhead Spending Variances
VOSV = (AVOR x AH) – (SVOR x AH)
= (AVOR – SVOR)AH
= ($4.00 – $3.85)400
= $60 U

29. Flexible Budget Performance Report For the Week Ended March 8, 2004
Crunch Chips, Inc.
Flexible Budget Performance Report
For the Week Ended March 8, 2004
Cost Formula
Actual Costs
Spending Variance
Budget
Gas $3.00 $1,190 $1,200 $10 F
Electricity U
Water F
Total cost $3.85 $1,600 $1, $60 U

30. For the Week Ended March 8, 2004
Crunch Chips, Inc.
Performance Report
For the Week Ended March 8, 2004
Budget for Standard Hours
Cost Formula
Actual Costs
Spending Variance
EfficiencyVariance
Budget
Gas $3.00 $1,190 $1,200 $10 F
Electricity U
Water F
Total cost $3.85 $1,600 $1, $60 U
$1,135 $65 U U U
$1,456 $84 U

31. Fixed Overhead Variances
Budgeted or Planned Items
Budgeted fixed overhead $749,970
Practical activity 23,400 direct labor hours
Standard fixed overhead rate $32.05
Hours allowed to produce 3,000,000 bags of chips: x 3,000,000 = $23,400
Actual Results
Actual production 2,750,000 bags of chips
Actual fixed overhead cost $749,000
Standard hours allowed for actual production 21,450

32. Total Fixed Overhead Variances
Applied fixed overhead
Standard fixed overhead rate x Standard hours =
= $32.05 x 21,450
= $687,473 (rounded)
Total fixed overhead variance
$749,000 – $687,473 =
= $61,527 underapplied

33. Fixed Overhead Variances: Columnar Approach
Actual FO
$749,000
Budgeted FO
$749,970
Applied FO
$687,473
$970 F
Spending Variance
$62,497 U
Volume Variance
$61,527 U
Total Variance

34. Crunch Chips, Inc.
Performance Report
For the Year Ended 2004
Fixed Overhead Items
Actual Costs
Budgeted Cost
Variance
Depreciation $530,000 $530,000 $ ----
Salaries 159, , F
Taxes 50,500 50, U
Insurance , , F
Total fixed overhead $749,000 $749, $970 F

35. Volume Variance Volume variance = $32.05(23,400 – 21,450)
= ($32.05 x 23,400) – ($32.05 x 21,450)
= $749,970 – $687,473
= Budgeted fixed overhead – Applied fixed overhead
= $62,497 U

36. Appendix: Accounting for Variances

37. Material Price Variance
The actual price is $ per ounce of corn and standard price is $0.0060, and 780,000 ounces of corn are purchased.
Materials Inventory
Materials Price Variance
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
Accounts Payable
Material Price Variance

38. Material Usage Variance
During the period 780,000 ounces of corn is placed into production. The standard quantity is 873,000 ounces, and standard price is $0.006.
Work in Process
Materials Usage Variance
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
Materials Inventory
Material Usage Variance

39. During the period the firm has 360 actual inspection hours, while the standard hours for the units produced is hours. The actual rate is $7.35 per hour while the standard rate is $7.00 per hour.
Work in Process
Labor Efficiency Variance
Labor Rate Variance
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
Accrued Payroll
Labor Variances

40. At the end of the year, the variances for materials and labor are usually closed to Cost of Goods Sold.
Cost of Goods Sold
Material Price Variance
Labor Efficiency Variance
Labor Rate Variance
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
Closing Variances

41. At the end of the year, the variances for materials and labor are usually closed to Cost of Goods Sold.
Material Usage Variance
Cost of Goods Sold
The receiving report and the invoice are used to record the receipt of the merchandise and to control the payment.
Closing Variances

42. Chapter Nine
The End