1. Chapter 10

2. Are standards the same as budgets? A standard is the expected cost for one unit. A budget is the expected cost for all units. Standards vs. Budgets

3. Standard Costs Provide benchmarks for measuring performance. Establish the expected level of performance. Based on carefully predetermined amounts. Used for planning material, labor, and overhead requirements. Standard Costs are

4. Standard Costs Direct Labor Managers focus on quantities and costs that exceed standards, a practice known as management by exception. Type of Product Cost Amount Direct Material Manufacturing Overhead Standard

5. Setting Standard Costs Practical standards should be set at levels that are currently attainable with reasonable and efficient effort.

6. Setting Standard Costs I agree. Ideal standards, that are based on perfection, are unattainable and discourage most employees.

7. Standard Cost Card – Variable Production Cost A standard cost card for one unit of product might look like this:

8. A General Model for Variance Analysis Variance Analysis Price Variance Difference between actual price and standard price Quantity Variance Difference between actual quantity and standard quantity

9. A General Model for Variance Analysis AQ(AP - SP) SP(AQ - SQ) AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity Price VarianceQuantity Variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price

10. Standard Cost Variances Product Cost Standard This variance is unfavorable because the actual cost exceeds the standard cost. A standard cost variance is the amount by which an actual cost differs from the standard cost.

11. Standard Cost Variances I see that there is an unfavorable variance. But why are variances important to me? First, they point to causes of problems and directions for improvement. Second, they trigger investigations in departments having responsibility for incurring the costs.

12. Setting Direct Material Standards Price Standards Summarized in a Bill of Materials. Final, delivered cost of materials, net of discounts. Quantity Standards

13. Price varianceQuantity variance Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price Material Variances Summary

14. Materials Price VarianceMaterials Quantity Variance Production Manager Purchasing Manager The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing manager’s performance. Responsibility for Material Variances

15. Setting Direct Labor Standards Rate Standards Often a single rate is used that reflects the mix of wages earned. Time Standards Use time and motion studies for each labor operation.

16. Rate varianceEfficiency variance Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Labor Variances Summary

17. Responsibility for Labor Variances Production Manager Production managers and H. R. managers are usually held accountable for labor variances because they can influence the: Mix of skill levels assigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees.

18. Setting Variable Manufacturing Overhead Standards Rate Standards The rate is the variable portion of the predetermined overhead rate. Quantity Standards The quantity is the activity in the allocation base used for predetermined overhead.

19. Rate varianceEfficiency variance Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate Variable Manufacturing Overhead Variances Summary

20. Responsibility for Overhead Variances Production Manager Production managers are usually held accountable for overhead variances because they can influence the: Costs incurred on the shop floor. Quality of production supervision. ngprovidedtoemployees.ngprovidedtoemployees.

21. Variable Overhead Variances – A Closer Look Rate Variance Efficiency Variance Results from paying more or less than expected for overhead items and from excessive usage of overhead items. Controlled by managing the overhead cost driver.

22. Variance Analysis and Management by Exception How do I know which variances to investigate? Larger variances, in dollar amount or as a percentage of the standard, are investigated first.

23. Advantages of Standard Costs Management by exception Improved cost control and performance evaluation Better Information for planning and decision making Possible reductions in production costs Advantages

24. Potential Problems Emphasis on negative may impact morale. Emphasizing standards may exclude other important objectives. Favorable variances may be misinterpreted. Continuous improvement may be more important than meeting standards. Standard cost reports may not be timely.

25. End of Chapter 10