1. Standard Costing and Variance Analysis
Cost Accounting
Foundations and Evolutions
Kinney and Raiborn
Seventh Edition
Chapter 7
Standard Costing and Variance Analysis
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2. Learning Objectives (1 of 2)
Describe how standards are set for material, labor, and overhead
List the documents that are associated with standard cost systems and describe the information that those documents provide
Calculate and record material, labor, and overhead variances

3. Learning Objectives (2 of 2)
Explain why standard cost systems are used
Identify changes in the use of standards
Contrast the traditional labor and overhead elements to a single conversion element
(Appendix) Explain how multiple material and labor categories affect variances

4. Standards Standard costs are budgeted costs to
manufacture a single unit of product, or
perform a single service
To develop standards identify
material and labor types, quantities, and prices
overhead types and behavior

5. Material Standards Materials used Types Quantity Quality Price From
Product specifications, observation, inquiry
Bill of materials
Balance cost, quality, and projected sales price

6. Labor Standards Labor used From
Types
Production, setup, cleanup, and rework
Quantity
Cost
Include wages, payroll taxes, and fringe benefits
From
Industrial engineering studies including methods-time measurement (MTM), time and motion studies, historical data
Operations flow document

7. Overhead Standards Variable and fixed manufacturing overhead
Estimated level of activity
Estimated costs
Predetermined factory overhead application rates

8. Total Variance SP x SQ AP x AQ Total Variance Inputs Outputs
AP = actual cost/price per unit of materials or hours of labor
AQ = actual quantity of materials or hours of labor
SP = standard cost/price per unit of materials or hours of labor
SQ = standard quantity of materials or hours of labor

9. Material Price Variance (MPV)
AP x AQ
SP x SQ
Total Variance
SP x AQ
MPV
What
was
paid
What should
have been
paid
(AP - SP) x AQ*
*Favorable or unfavorable

10. Material Price Variance
Calculate Material Price Variance at
point of purchase, or
when materials used

11. Material Quantity Variance (MQV)
AP x AQ
SP x SQ
Total Variance
SP x AQ
MQV
What
was
used
What should
have been
used for
level of output
(AQ - SQ) x SP*
*Favorable or unfavorable

12. Labor Rate Variance (LRV)
AP x AQ
SP x SQ
Total Variance
SP x AQ
LRV
What
was
paid
What should
have been
paid
(AP - SP) x AQ*
*Favorable or unfavorable

13. Labor Efficiency Variance (LEV)
AP x AQ
SP x SQ
Total Variance
SP x AQ
LEV
What
was
used
What should
have been
used for
level of output
(AQ - SQ) x SP*
*Favorable or unfavorable

14. Variable Overhead Variances
VOH Spending Variance
VOH Efficiency Variance
Total VOH Variance
SP x SQ
SP x AQ
Actual VOH
Budgeted VOH
Applied VOH
Actual
For
actual
hours
used
What should have been
used for level of output

15. VOH Spending Variance Caused by price differences
managers have little control over prices
Caused by shrinkage or waste
managers should be held accountable

16. Fixed Overhead Variances
SP x SQ
Actual FOH
Budgeted FOH
Applied FOH
FOH Spending Variance
FOH Volume Variance
Total FOH Variance
Constant
Amount
What should have been
used for level of output

17. FOH Spending Variance Calculate variance for each component
Caused by price differences
May reflect mismanagement of resources

18. FOH Volume Variance Measures capacity utilization
Caused by producing at a level that differs from the capacity level used to compute the predetermined overhead rate
Also called the noncontrollable variance

19. Three Variance Approach
Budgeted OH
Actual OH
Standard OH
based on Actual inputs
based on actual output
SP x SQ
VOH & FOH Spending Variance
OH Efficiency Variance
Volume Variance
Total OH Variance
Applied Overhead

20. Why Use Standard Cost Systems
Clerical efficiency
Motivation
Planning
Controlling - variance analysis
Decision making
Performance evaluation

21. Setting Standards Appropriateness Attainability Expected standards
Practical standards
Ideal standards

22. Questions How are standards set for material, labor, and overhead?
How is variance analysis used for control and performance evaluation?
Why are labor and overhead elements sometimes combined into a single conversion element?

23. Potential Ethical Issues
Setting high standards to create favorable variances
Ignoring effects of one production area on another
Setting overhead rates too low based on high production levels to distort inventory cost and operating income

24. Potential Ethical Issues
Producing inventory only to create a favorable volume variance
Not updating standards so that favorable variances are created
Using low quality materials or labor to create favorable variances and low quality products