Standard Costing System Accounting WHBM23.ppt

Accounting

1. © The McGraw-Hill Companies, Inc., 2002
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Standard Cost Systems
Chapter
23

2. © The McGraw-Hill Companies, Inc., 2002
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Benchmarks for
measuring performance.
The expected level
of performance.
Based on carefully
predetermined amounts.
Used for planning labor, material
and overhead requirements. Standard
Costs are
Standard Cost Systems

3. © The McGraw-Hill Companies, Inc., 2002
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Direct
Material
Type of Product Cost
Amount
Direct
Labor
Manufacturing
Overhead
Standard cost
A standard cost variance
is the amount by which
an actual cost differs from
the standard cost.
Standard Cost Systems

4. © The McGraw-Hill Companies, Inc., 2002
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Type of Product Cost
Amount
This variance is unfavorable
because the actual cost
exceedsthe standard cost.
This variance is
favorable because
the actual cost
is less than the
standard cost.
Standard cost
Standard Cost Systems
Direct
Labor
Manufacturing
Overhead
Direct
Material

5. © The McGraw-Hill Companies, Inc., 2002
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Prepare standard
cost performance
report
Conduct next
period’s
operations
Analyze
variances
Identify
questions
Receive
explanations
Take
corrective
actions
Begin
Variance Analysis

6. © The McGraw-Hill Companies, Inc., 2002
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Should we use
normalstandards
or ideal standards?
Engineer
Managerial
Accountant
Establishing and Revising
Standard Costs
Normal standards should be
set at levels that are currently
attainable with reasonable and
efficient effort.
Production
manager

7. © The McGraw-Hill Companies, Inc., 2002
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I agree. Ideal standards, that are
based on perfection, are
unattainable and therefore
discouraging to most employees.
Human
Resources
Manager
Establishing and Revising
Standard Costs

8. © The McGraw-Hill Companies, Inc., 2002
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Are standards the
same as budgets?
A standard is the
expected cost for one
unit.
A budget is the
expected cost for all
units.
Use of Standard Costs in
Developing Budgets

9. © The McGraw-Hill Companies, Inc., 2002
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Use product
design specifications.
Use competitive
bids for the quality
and quantity desired.
Quantity
Standards
Direct Material Standards
Price
Standards

10. © The McGraw-Hill Companies, Inc., 2002
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The standard material cost for one unit of product is:
standard quantity
standard price for of material
one unit of material required for one
unit of product
×
Direct Material Standards

11. © The McGraw-Hill Companies, Inc., 2002
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Time
Standards
Rate
Standards
Direct Labor Standards
Use time and
motion studies for
each labor operation.
Use wage
surveys and
labor contracts.

12. © The McGraw-Hill Companies, Inc., 2002
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The standard labor cost for one unit of product is:
standard number
standard wage rate of labor hours
for one hour for one unit
of product
×
Setting Direct Labor Standards

13. © The McGraw-Hill Companies, Inc., 2002
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Activity
Standards
Rate
Standards
Manufacturing Overhead Standards
The activity is the
cost driver used to
calculate the overhead
rate.
The rate is based
on an estimate of total
overhead at the normal
level of activity.

14. © The McGraw-Hill Companies, Inc., 2002
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×
The standard overhead cost for one unit of product is:
standard variable standard number
overhead rate for of activity units
one unit of for one unit of
activity product
×
Manufacturing Overhead Standards

15. © The McGraw-Hill Companies, Inc., 2002
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Standard Cost Variances
Quantity VariancePrice Variance
A General Model for
Variance Analysis
The difference between
the actual priceand the
standard price
The difference between
the actualquantity and
the standard quantity

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Standard price is the amount that should
have been paidfor the resources acquired.
Actual Quantity Actual QuantityStandard Quantity
× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance
A General Model for
Variance Analysis

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Actual Quantity Actual QuantityStandard Quantity
× × ×
Actual Price Standard Price Standard Price
Price Variance Quantity Variance
A General Model for
Variance Analysis
Standard quantity is the quantity that should
have been used for the actual good output.

18. © The McGraw-Hill Companies, Inc., 2002
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Let’s use the
concepts of the
general model to
calculate standard
cost variances,
starting with
direct material.
Standard Costs and Variance
Analysis: An Illustration

19. © The McGraw-Hill Companies, Inc., 2002
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Hanson Inc. has the following material
standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Records last week show 1,700 pounds of
material were purchased on May 10 at a
total cost of $6,630. The material was used
to make 1,000 Zippies that were completed
on May 15.
Standard Costs and Variance
Analysis: An Illustration
Zippy

20. © The McGraw-Hill Companies, Inc., 2002
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ActualQuantity ActualQuantityStandardQuantity
× × ×
ActualPrice StandardPrice StandardPrice
Price Variance Quantity Variance
Materials price variance Materials quantity variance
Labor rate variance Labor efficiency variance
Variable overhead Variable overhead
spending variance efficiency variance
AQ(AP -SP) SP(AQ -SQ)
AQ = Actual Quantity SP= Standard Price
AP= Actual Price SQ= Standard Quantity
Material Price and Quantity
Variances

21. © The McGraw-Hill Companies, Inc., 2002
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Theactual priceper pound paid for
the material was
a.$4.00 per pound.
b.$4.10 per pound.
c.$3.90 per pound.
d.$6.63 per pound.
Material Variances
Question 1
Zippy

22. © The McGraw-Hill Companies, Inc., 2002
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Theactual price per pound paid for
the material was
a.$4.00 per pound.
b.$4.10 per pound.
c.$3.90 per pound.
d.$6.63 per pound.
AP = $6,630 ÷1,700 lbs.
AP = $3.90 per lb.
Material Variances
Question 1
Zippy

23. © The McGraw-Hill Companies, Inc., 2002
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Material Variances
Question 2
Hanson’s material price variance (MPV)
for the week was
a.$170 unfavorable.
b.$170 favorable.
c.$800 unfavorable.
d.$800 favorable.
Zippy

24. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s material price variance (MPV)
for the week was
a.$170 unfavorable.
b.$170 favorable.
c.$800 unfavorable.
d.$800 favorable.
MPV = AQ(AP -SP)
MPV = 1,700 lbs. ×($3.90 -4.00)
MPV = $170 favorable
Material Variances
Question 2
Zippy

25. © The McGraw-Hill Companies, Inc., 2002
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Thestandard quantity of material that
should have been used to produce
1,000 Zippies is
a.1,700 pounds.
b.1,500 pounds.
c.2,550 pounds.
d.2,000 pounds.
Material Variances
Question 3
Zippy

26. © The McGraw-Hill Companies, Inc., 2002
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Thestandard quantity of material that
should have been used to produce
1,000 Zippies is
a.1,700 pounds.
b.1,500 pounds.
c.2,550 pounds.
d.2,000 pounds.
SQ = 1,000 units ×1.5 lbs per unit
SQ = 1,500 lbs
Material Variances
Question 3
Zippy

27. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s material quantity variance (MQV)
for the week was
a.$170 unfavorable.
b.$170 favorable.
c.$800 unfavorable.
d.$800 favorable.
Material Variances
Question 4
Zippy

28. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s material quantity variance (MQV)
for the week was
a.$170 unfavorable.
b.$170 favorable.
c.$800 unfavorable.
d.$800 favorable.
MQV = SP(AQ -SQ)
MQV = $4.00(1,700 lbs -1,500 lbs)
MQV = $800 unfavorable
Material Variances
Question 4
Zippy

29. © The McGraw-Hill Companies, Inc., 2002
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Actual Quantity Actual QuantityStandard Quantity
× × ×
Actual Price Standard Price Standard Price
1,700 lbs. 1,700 lbs. 1,500 lbs.
× × ×
$3.90 per lb. $4.00 per lb. $4.00 per lb.
$6,630 $ 6,800 $6,000
Price variance
$170 favorable
Quantity variance
$800 unfavorable
Material Variances
Summary
Zippy

30. © The McGraw-Hill Companies, Inc., 2002
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I am not responsible for
this unfavorable material
quantity variance.
You purchased cheap
material, so my people
had to use more of it.
Responsibility for
Material Variances
You used too much material
because of poorly trained
workers and poorly
maintained equipment.
Also, your poor scheduling
sometimes requires me to
rush order material at a
higher price, causing
unfavorable price variances.

31. © The McGraw-Hill Companies, Inc., 2002
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Let’s turn
our
attention
to labor
variances.
Labor Rate and Efficiency
Variances

32. © The McGraw-Hill Companies, Inc., 2002
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Hanson Inc. has the following labor
standard to manufacture one Zippy:
1.5 standard hours per Zippy at $8.00 per hour
Payroll records last week show 1,450
hours were worked at a total labor cost
of $11,890 to make 1,000 Zippies that
were completed on May 15.
Standard Costs and Variance
Analysis: An Illustration
Zippy

33. © The McGraw-Hill Companies, Inc., 2002
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ActualHours ActualHours StandardHours
× × ×
ActualRate StandardRate StandardRate
Rate Variance Efficiency Variance
Materials price variance Materials quantity variance
Labor rate variance Labor efficiency variance
Variable overhead Variable overhead
spending variance efficiency variance
AH(AR -SR) SR(AH -SH)
AH = Actual Hours SR= Standard Rate
AR= Actual Rate SH= Standard Hours
Labor Rate and Efficiency
Variances

34. © The McGraw-Hill Companies, Inc., 2002
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Hanson’sactual rate (AR) for labor
for the week was
a.$8.20 per hour.
b.$8.00 per hour.
c.$7.80 per hour.
d.$7.60 per hour.
Labor Variances
Question 1
Zippy

35. © The McGraw-Hill Companies, Inc., 2002
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Hanson’sactual rate (AR) for labor
for the week was
a.$8.20 per hour.
b.$8.00 per hour.
c.$7.80 per hour.
d.$7.60 per hour.
AR = $11,890 ÷1,450 hours
AR = $8.20 per hour
Labor Variances
Question 1
Zippy

36. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s labor rate variance (LRV) for
the week was
a.$290 unfavorable.
b.$290 favorable.
c.$400 unfavorable.
d.$400 favorable.
Labor Variances
Question 2
Zippy

37. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s labor rate variance (LRV) for
the week was
a.$290 unfavorable.
b.$290 favorable.
c.$400 unfavorable.
d.$400 favorable.
LRV = AH(AR -SR)
LRV = 1,450 hrs($8.20 -$8.00)
LRV = $290 unfavorable
Labor Variances
Question 2
Zippy

38. © The McGraw-Hill Companies, Inc., 2002
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Thestandard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is
a.1,550 hours.
b.1,500 hours.
c.1,700 hours.
d.1,800 hours.
Labor Variances
Question 3
Zippy

39. © The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Thestandard hours (SH) of labor that
should have been worked to produce
1,000 Zippies is
a.1,550 hours.
b.1,500 hours.
c.1,700 hours.
d.1,800 hours.
SH = 1,000 units ×1.5 hours per unit
SH = 1,500 hours
Labor Variances
Question 3
Zippy

40. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s labor efficiency variance (LEV)
for the week was
a.$290 unfavorable.
b.$290 favorable.
c.$400 unfavorable.
d.$400 favorable.
Labor Variances
Question 4
Zippy

41. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s labor efficiency variance (LEV)
for the week was
a.$290 unfavorable.
b.$290 favorable.
c.$400 unfavorable.
d.$400 favorable.
LEV = SR(AH -SH)
LEV = $8.00(1,450 hrs -1,500 hrs)
LEV = $400 favorable
Labor Variances
Question 4
Zippy

42. © The McGraw-Hill Companies, Inc., 2002
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Rate variance
$290 unfavorable
Efficiency variance
$400 favorable
Actual Hours Actual HoursStandard Hours
× × ×
Actual Rate Standard Rate Standard Rate
1,450 hours 1,450 hours 1,500 hours
× × ×
$8.20 per hour $8.00 per hour $8.00 per hour
$11,890 $11,600 $12,000
Labor Variances
Summary
Zippy

43. © The McGraw-Hill Companies, Inc., 2002
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High skill,
high rate
Low skill,
low rate
Using highly paid skilled workers to
perform unskilled tasks results in an
unfavorable rate variance.
Production managers who make work assignments
are generally responsible for rate variances.
Labor Rate Variance

44. © The McGraw-Hill Companies, Inc., 2002
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Unfavorable
Efficiency
Variance
Poorly
trained
workers
Poor
supervision
of workers
Poor
quality
materials
Poorly
maintained
equipment
Labor Efficiency Variance

45. © The McGraw-Hill Companies, Inc., 2002
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I am not responsible for
the unfavorable labor
efficiency variance!
You purchased cheap
material, so it took more
time to process it.
You used too much
time because of poorly
trained workers and
poor supervision.
Responsibility for Labor Variances

46. © The McGraw-Hill Companies, Inc., 2002
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Maybe I can attribute the labor
and material variances to personnel
for hiring the wrong people
and training them poorly.
Responsibility for Labor Variances

47. © The McGraw-Hill Companies, Inc., 2002
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Let’s turn our
attention to
manufacturing
overhead
Manufacturing Overhead Variances

48. © The McGraw-Hill Companies, Inc., 2002
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Recall that overhead costs are applied to
products and services using a
predetermined overhead rate (POHR):
POHR =
Applied Overhead = POHR ×Standard Activity
Estimated total overhead costs
Estimated activity
Manufacturing Overhead Variances

49. © The McGraw-Hill Companies, Inc., 2002
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Overhead Rate
Contains variable
overhead that
increases as
activity increases.
Contains fixed
overhead that
remains constant as
activity changes.
Function of activity level
chosen to determine rate.
Manufacturing Overhead Variances

50. © The McGraw-Hill Companies, Inc., 2002
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Hanson, Inc. has the following manufacturing
overhead at three different levels of activity:
Hanson applies overhead based on machine hour activity.Machine Hours 2,000 3,000 4,000
Zippies 1,000 1,500 2,000
Variable Overhead 4,000$ 6,000$ 8,000$
Fixed Overhead 9,000 9,000 9,000
Total Overhead 13,000$ 15,000$ 17,000$
Manufacturing Overhead
Variances Example
Zippy

51. © The McGraw-Hill Companies, Inc., 2002
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Overhead Variances
Question 1
Zippy
The total overhead rate for an estimated
activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.

52. © The McGraw-Hill Companies, Inc., 2002
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The total overhead rate for an estimated
activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
$15,000 ÷3,000 machine hours
Overhead Variances
Question 1
Zippy

53. © The McGraw-Hill Companies, Inc., 2002
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The total overhead rate for an estimated
activity of 3,000 machine hours (MH) is:
a. $5.00 per machine hour.
b. $4.00 per machine hour.
c. $3.00 per machine hour.
d. $2.00 per machine hour.
$15,000 ÷3,000 machine hours
The $5.00 overhead rate contains
a variableportion:
$6,000 ÷3,000 MH = $2.00 per MH
and afixed portion:
$9,000 ÷3,000 MH = $3.00 per MH
Overhead Variances
Question 1
Zippy

54. © The McGraw-Hill Companies, Inc., 2002
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Budgeted Applied
Actual Overhead at Overhead at
Overhead Actual Activity Standard Hours
Spending
Variance
Volume
Variance
Manufacturing Overhead Variances

55. © The McGraw-Hill Companies, Inc., 2002
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Budgeted Applied
Actual Overhead at Overhead at
Overhead Actual Activity Standard Hours
Spending
Variance
Volume
Variance
Manufacturing Overhead Variances
Shows how economically
overhead services were
purchased and how
efficiently overhead
services were used.
Contains both fixed
and variable costs.
A controllable variance.

56. © The McGraw-Hill Companies, Inc., 2002
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Budgeted Applied
Actual Overhead at Overhead at
Overhead Actual Activity Standard Hours
Spending
Variance
Volume
Variance
Manufacturing Overhead Variances
Caused by producing at
a level other than that
used for computing the
standard overhead rate.
Contains only fixed costs.

57. © The McGraw-Hill Companies, Inc., 2002
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Hanson’s actual production for the
period was 1,600 Zippies resulting in
3,200 standard machine hours. Actual
total overhead cost for the period was
$15,450.
Compute the overhead spending and
volume variances.
Manufacturing Overhead
Variances Example
Zippy

58. © The McGraw-Hill Companies, Inc., 2002
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Budgeted Applied
Actual Overhead at Overhead at
Overhead Standard Hours Standard Hours
$15,450 $9,000 fixed 3,200 hrs.
+ ×
$6,400 variable $5.00 per hr.
$2.00 per hr. ×3,200 hrs.
Manufacturing Overhead
Variances Example
Zippy

59. © The McGraw-Hill Companies, Inc., 2002
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Budgeted Applied
Actual Overhead at Overhead at
Overhead Standard Hours Standard Hours
Spending variance
$50 unfavorable
Volume variance
$600 favorable
$15,450 $9,000 fixed 3,200 hrs.
+ ×
$6,400 variable $5.00 per hr.
$15,450 $15,400 $16,000
Manufacturing Overhead
Variances Example
Zippy

60. © The McGraw-Hill Companies, Inc., 2002
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Standard Cost Variances
Immaterial Amounts
Close to
Cost of Goods Sold
Work in Process
Finished Goods
Cost of Goods Sold.
Material Amounts
Close by
apportioning to:
Disposing of Variances

61. © The McGraw-Hill Companies, Inc., 2002
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Advantages
Improved cost control
and performance
evaluation.
Better information
for planning and
decision making.
Possible reductions
in production costs.
Advantages of Standard Costs

62. © The McGraw-Hill Companies, Inc., 2002
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Disadvantages
Emphasis on
negative
exceptions may
impact morale.
Emphasis on negative
exceptions may
lead to under-reporting.
It may be difficult
to determine
which variances
are significant.
Disadvantages of Standard Costs

63. © The McGraw-Hill Companies, Inc., 2002
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JIT systems may reduce unfavorable variances.
Long-term agreements
with suppliers eliminate
price variances.
Emphasis on quality
reduces material
quantity variances.
Well-trained flexible
work force reduces labor
efficiency variance.
JIT Systems and Variance Analysis

64. © The McGraw-Hill Companies, Inc., 2002
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End of Chapter 23