Post on 05-Jan-2016
Standard Costing and Analysis of Direct Costs
CHAPTER 10
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Managing CostsManaging Costs
Standardcost
Actualcost
Comparison between standard and actual
performancelevel
Costvariance
10-2
Management by ExceptionManagement by Exception
DirectMaterial
Managers focus on quantities and coststhat exceed standards, a practice known as
management by exception..
Type of Product Cost
Am
ou
nt
DirectLabor
Standard
10-3
Setting StandardsSetting Standards
Analysis ofHistorical Data
TaskAnalysis
CostStandards
10-4
Participation in Setting Participation in Setting StandardsStandards Accountants, engineers, personnel administrators,
and production managers combine efforts to set standards based on experience and expectations.
10-5
Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue
Should we usepractical standards
or perfection standards?
Practical standardsshould be set at levels
that are currentlyattainable with reasonable andefficient effort.
10-6
I agree. Perfection standards are
unattainable and therefore discouraging
to most employees.
Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue
10-7
Standard Cost Variances
Cost Variance AnalysisCost Variance Analysis
Quantity VariancePrice Variance
The difference betweenthe actual price and the
standard price.
The difference betweenthe actual quantity andthe standard quantity.
10-8
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
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
10-9
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard price is the amount that should have been paid for the resources acquired.
10-10
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard quantity is the quantity that should have been used.
10-11
Standard CostsStandard Costs
Let’s use the concepts
of the general model to
calculate standard cost
variances, starting with
direct material.
10-12
Material VariancesMaterial Variances
Hanson Inc. has the following direct material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 1,700 pounds of material were purchased and used to make 1,000 Zippies. The
material cost a total of $6,630.
Zippy
10-13
Actual Quantity Actual Quantity Standard 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 SummaryMaterial Variances Summary
10-14
The price variance is computed on the entire
quantity purchased.
The quantity variance is computed only on the
quantity used.
Hanson purchased and used 1,700 pounds.
How are the variances computed if the amount purchased differs from
the amount used?
ZippyMaterial VariancesMaterial Variances
10-15
Material VariancesMaterial Variances
Hanson Inc. has the following material standard to manufacture one Zippy:
1.5 pounds per Zippy at $4.00 per pound
Last week 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700
pounds were used to make 1,000 Zippies.
Zippy
10-16
Material VariancesMaterial VariancesActual Quantity Actual Quantity Purchased Purchased × × Actual Price Standard Price
2,800 lbs. 2,800 lbs. × × $3.90 per lb. $4.00 per lb.
$10,920 $11,200
Price variance$280 favorable
Price variance increases because quantity
purchased increases.
Zippy
MPV = AQ(AP - SP)MPV = 2,800 lbs. × ($3.90 - 4.00)MPV = $280 Favorable
10-17
Actual Quantity Used Standard Quantity × × Standard Price Standard Price
1,700 lbs. 1,500 lbs. × × $4.00 per lb. $4.00 per lb.
$6,800 $6,000
Quantity variance$800 unfavorable
Quantity variance is unchanged because actual and standard
quantities are unchanged.
Material VariancesMaterial Variances Zippy
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs
- 1,500 lbs) MQV = $800 unfavor.
10-18
Isolation of Material VariancesIsolation of Material VariancesI need the variances as soon
as possible so that I canbetter identify problems
and control costs.
You accountants just don’tunderstand the problems
we production managers have.
Okay. I’ll start computingthe price variance when
material is purchased andthe quantity variance assoon as material is used.
10-19
Standard CostsStandard Costs
Now let’s calculate standard cost variances for direct labor.
10-20
Hanson Inc. has the following direct labor standard to manufacture one Zippy:
1.5 standard hours per Zippy at $10.00 per direct labor hour
Last week 1,550 direct labor hours were worked at a total labor cost of $15,810 to
make 1,000 Zippies.
Labor VariancesLabor Variances Zippy
10-21
Actual Hours Actual Hours Standard Hours × × × Actual Rate Standard Rate Standard Rate
Labor Variances SummaryLabor Variances Summary
Rate variance$310 unfavorable
Efficiency variance$500 unfavorable
1,550 hours 1,550 hours 1,500 hours × × ×$10.20 per hour $10.00 per hour $10.00 per hour
$15,810 $15,500 $15,000
10-22
Significance of Cost VariancesSignificance of Cost Variances
1. Size of variance1. Dollar amount2. Percentage of
standard
2. Recurring variances3. Trends4. Controllability5. Favorable variances6. Costs and benefits
of investigation
What clues help me to determine the
variances that I should investigate?
10-23
Controllability of VariancesControllability of Variances
Direct-Material Price Variance
Direct-Labor Rate Variance
Direct-Material Quantity Variance
Direct-Labor Efficiency Variance
10-24
If I buy cheaper materials, my direct-materials expenses will be lower than
what is budgeted. Then I’ll get my bonus. But we may lose customers because of
lower quality.
Behavioral Impact of Standard Behavioral Impact of Standard CostingCosting
10-25
Interaction among VariancesInteraction among Variances
I am not responsible for the unfavorable labor
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
10-26
Standard Costs and Product Standard Costs and Product CostingCosting
Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.
Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.
Standard cost variancesare closed directly toCost of Goods Sold.
Standard cost variancesare closed directly toCost of Goods Sold.
10-27
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
Unfavorable Favorablevariance variance
Direct-Material Price Variance
Actual quantity atactual cost
Accounts Payable
10-28
Unfavorable Favorablevariance variance
Direct-Material Quantity Variance
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
10-29
Unfavorable Favorablevariance variance
Direct-Labor Rate Variance
Actual quantity atactual cost
Wages Payable
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Unfavorable Favorablevariance variance
Direct-Labor Efficiency Variance
10-30
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Unfavorable Favorablevariance variance
Cost of Goods Sold
10-31
End of Chapter 10End of Chapter 10
Let’s set the standard alittle higher.
10-32