14-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Standard Costing: A...

14-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

Standard Standard Costing: A Costing: A Managerial Managerial Control ToolControl Tool

1414

PowerPresentation® prepared by PowerPresentation® prepared by

David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University


Learning ObjectivesLearning Objectives

Explain how unit standards are set and why standard cost systems are adopted.

Explain the purpose of a standard cost sheet.

Describe the basic concepts underlying variance analysis and explain when variances should be investigated.


Learning Objectives Learning Objectives (continued)(continued)

Compute the materials and labour variances and explain how they are used for control.

Compute the variable and fixed overhead variances and explain their meaning.

Use variance analysis as an analytical tool for profitability analysis. (Appendix A)


Learning Objectives Learning Objectives (continued)(continued)

Prepare journal entries for materials and labour variances and describe the accounting for overhead variances. (Appendix B)


Unit Standard CostUnit Standard Cost

To determine the unit standard cost for a particular input, two decisions must be made:

1. How much of the input should be used per unit of output ? (Quantity decision)

2. How much should be paid for the quantity of the input to be used ? (Pricing decision)


Types of StandardsTypes of Standards

Ideal Standards demand maximum efficiency and can be achieved only if everything operates perfectly.

Currently attainable standards can be achieved under efficient operating conditions.


Sources for Quantitative StandardsSources for Quantitative Standards

1. Historical experience

2. Engineering studies

3. Input from operating personnel


Factors for Price Standards - MaterialsFactors for Price Standards - Materials

1. Market forces

2. Quality

3. Discounts

4. Freight


Factors for Price Standards - LabourFactors for Price Standards - Labour

1. Market forces

2. Trade unions

3. Payroll taxes

4. Qualifications


Purposes of StandardsPurposes of Standards

To improve planning and control

To facilitate product costing


Cost Assignment ApproachesCost Assignment Approaches

Manufacturing Costs

Direct Direct

Materials labour Overhead

Actual costing system Actual Actual Actual

Normal costing system Actual Actual Budgeted

Standard costing system Standard Standard Standard


A Standard Cost SheetA Standard Cost Sheet

Standard Standard Standard

Description Price Usage Cost/Unit

Direct materials $1.50/kg. 10 kgs. $15.00

Direct labour $6.00/hr. 2 hours 12.00

Variable overhead $10.00/hr. 2 hours 20.00

Fixed Overhead1 $8.00/hr. 2 hours 16.00

$63.00

Other Operating Data for Period:

Units produced 20,000 units

210,000 kilograms purchased @ $1.55 per kilogram; 205,000 kgs.

used

Direct labour costs 39,000 hours @ $6.10 per hour

Variable overhead $410,000

1Fixed overhead $300,000; Rate = ($310,000/38,750 hrs)


Variable Cost Variance Analysis:Variable Cost Variance Analysis:General DescriptionGeneral Description

Actual Quantity of Input at Actual Price

AQ x AP

Actual Quantity ofInput at Standard Price

AQ x SP

Standard Quantity ofInput at Standard Price

SQ x SP

PriceVariance

AQ x (AP - SP)

UsageVariance

SP x (AQ - SQ)

BudgetVariance

(AQ x AP) - (SQ x SP)


Variance InvestigationVariance Investigation

Variances are investigated if two conditions are met:

1. The variance is material

2. The benefits of investigating and taking corrective action are greater than its costs


Control Limits: Control Limits: Standard Standard ++ Allowable Deviation Allowable Deviation

Investigating occurs for values outside the allowable range.

Example: Assume the allowable deviation may be the lesser of $8,000 or 10% of the standard. Suppose the standard is $50,000 and the actual deviation from standard is $6,000. Will the variance be investigated.

Answer: Yes. Ten percent of standard is $5,000. Since $6,000 is larger than the allowable deviation, an investigation will take place.


Material VariancesMaterial Variances

Formula Approach:

MPV = (AP - SP)AQ MUV = (AQ - SQ)SP

= ($1.55-$1.50)210,000 = (205,000 - 200,000)$1.50

= $10,500 U = $7,500U

Diagram Approach:

AQ x AP AQ x SP AQ x SP SQ x SP

210,000 x $1.55 210,000 x $1.50 205,000 x $1.50 200,000 x $1.50

MPV = $10,500U MUV = $7,500U

Flexible Budget Variance = $18,000U

Responsibility: Responsibility: Purchasing Manufacturing

SQ = 20,000 units x 10 lbs per unit


Labour VariancesLabour VariancesFormula Approach:

LRV = (AR - SR)AH LEV= (AH - SH)SR

= ($6.10 - $6.00)39,000 = (39,000 - 40,000)$6.00

= $3,900 U = $6,000 F

Diagram Approach:

AH x AR AH x SR SH x SR 39,000 x $6.10 39,000 x $6.00 40,000 x $6.00

LRV = $3,900 U LEV = $6,000 F

Flexible Budget Variance = $2,100 F

Responsibility: Responsibility: Human Resources Manufacturing

SQ = 20,000 units x 2 hrs. per unit


Variable Overhead VariancesVariable Overhead Variances

Formula Approach:

OSV = (AVOR - SVOR)AH OEV = (AH - SH)SVOR

= $410,000 - ($10 X 39,000 hrs) = (39,000 - 40,000)$10.00

= $20,000 U = $10,000 F

Diagram Approach: AH x AVOR AH x SVOR SH x SVOR

$410,000 39,000 x $10.00 40,000 x $10.00

OSV = $20,000 U OEV = $10,000 F

Flexible Budget Variance = $10,000 U

Responsibility: Responsibility:

Manufacturing Manufacturing

SQ = 20,000 units x 2 hrs. per unit


Fixed Overhead VariancesFixed Overhead Variances

Actual Overhead Budgeted Overhead Applied Overhead

$300,000 $310,000 SOR x SH ($8 x40,000)

OSV = $10,000F DV = 10,000F Responsibility: Responsibility:

Manufacturing Difficult to Assess

Alternative Approach for Computing FOH Denominator Variance

Planned level 38,750 hrs.

Applied level (SOR) 40,000 hrs.

Over 1,250 hrs.

x $8

FOH Denominator Variance $10,000 F

======


APPENDIX AAPPENDIX AAPPENDIX AAPPENDIX A


Further Analysis of the Further Analysis of the Profit Volume VarianceProfit Volume Variance

The profit volume variance can be decomposed further, for example into industry volume and market share variances

In the next slide, assume that the master budget was based on a certain percentage of market share, and that the industry experienced an increase in its volume of 10%


Master Budget(1,000 units)

Flexible Budget(800 units)

Actual(800 units)

Sales $ 100,000 $ 80,000 $ 82,000

Variable Costs 40,000 32,000 39,000

Contribution Margin 60,000 48,000 43,000

Fixed Costs 30,000 30,000 34,000

Operating Income 30,000 18,000 9,000

Comparing the flexible to the static (master) budget isolates theeffects of volume on profits, and comparing actual to flexible budgetisolates the appropriate cost variances as well as the sales pricevariance, as follows:

Profit volume variance = 18,000 – 30,000 = $ - 12,000 (U)Sales price variance = 82,000 – 80,000 = 2,000 (F)Variable cost variances = 32,000 – 39,000 = - 7,000 (U)Fixed cost variances = 30,000 – 34,000 = - 4,000 (U)

Total variances = $ - 21,000 (U)===========

Profit VariancesProfit Variances from Chapter 13from Chapter 13


Master Budget(1,000 units)

MasterBudgetadjusted forActualIndustryVolume

Flexible Budget(800 units)

Actual(800 units)

Sales $ 100,000 $ 110,000 $ 80,000 $ 82,000

Variable Costs 40,000 44,000 32,000 39,000

ContributionMargin

60,000 66,000 48,000 43,000

Fixed Costs 30,000 30,000 30,000 34,000

Operating Income 30,000 36,000 18,000 9,000

Comparing the flexible to the static (master) budget isolates the effects of volume onprofits This in turn can be broken down into an industry volume variance and a marketshare variance

Industry volume variance = 36,000 – 30,000 = $ 6,000 (F)Market share variance = 18,000 – 36,000 = - 18,000 (U) _______Profit volume variance = 18,000 – 30,000 = $ - 12,000 (U)

=========IVV = 10% of CM of $60,000MSV= 30,000 loss of revenues to maintain the same market share x CMR of 0.60

Industry Volume and Market Share VariancesIndustry Volume and Market Share Variances


Sales Mix VarianceSales Mix Variance

Assume that the previous statement was for a multi-product company, and that its budgeted CMR at its budgeted mix was 0.60.

Assume further that the actual sales mix would have resulted in a budgeted CMR of 0.58 instead

How much is the Sales Mix Variance?

Answer: - 0.02 x 80,000 = $ -1,600 U

The following spreadsheet includes a comprehensive analysis of all profit variances


Master Budget MasterBudgetadjusted forActualIndustryVolume

Flexible Budget FlexibleBudgetadjusted forActualSales Mix

Actual

Sales $ 100,000 $ 110,000 $ 80,000 $ 80,000 $ 82,000

Variable Costs 40,000 44,000 32,000 33,600 39,000

ContributionMargin

60,000 66,000 48,000 46,400 43,000

Fixed Costs 30,000 30,000 30,000 30,000 34,000

Operating Income 30,000 36,000 18,000 16,400 9,000

Summary of VariancesIndustry volume variance = 36,000 – 30,000 = $ 6,000 (F)Market share variance = 18,000 – 36,000 = - 18,000 (U) Profit volume variance = 18,000 – 30,000 = $ - 12,000 (U)Sales mix variance = 16,400 – 18,000 = - 1,600 (U)

Sales price variance = 82,000 – 80,000 = 2,000 (F)Variable cost variances = 33,600 – 39,000 = - 5,400 (U)Fixed cost variances = 30,000 – 34,000 = - 4,000 (U)

__________Total variances - 21,000 (U)

=========

Profit Variances - A Comprehensive AnalysisProfit Variances - A Comprehensive Analysis


Profitability Analysis:Profitability Analysis: Problem 14-44Problem 14-44

1. Total CM per Master Budget

A 9,000 x $8 = $72,000

B 6,500 x 11 = 71,500 $143,500

Total standard CM for Actual Quantities

A 10,000 x $8 = $80,000

B 6,000 x 11 = 66,000 $146,000

Profit Volume Variance (gross) 2,500 F

=======


Profitability AnalysisProfitability Analysis: : Problem 14-45 (continued)Problem 14-45 (continued)

2. Weighted average CM per unit based on Master Budget

$143,500/15,500 = 9.2581

Total standard CM for Actual Quantity 146,000

Total standard CM for 16,000 units

assuming budgeted sales mix

16,000 x $9.2581 148,129

Sales mix variance $ 2,129 U

Profit volume variance (net)

(16,000 - 15,500) x $9.2581 = 4,629 F


Profitability Analysis:Profitability Analysis: Problem 14-45 (continued)Problem 14-45 (continued)

3. Decline in industry sales

(77,500 - 64,000) x 77,500 = 17.42%

Industry volume variance

.1742 x 15,1500 x 9.2581 = $24,997 U

Budgeted market share: 15,500/77,500 = 20%

Market share variance

(16,000-[0.20 x 64,000]) x 9.2581 = $29,626 F

4. Sales Price Variance

A 10,000($21 - 20) = 10,000 F

B 6,000($32 - 30) = 12,000 F $22,000 F



5. Variable cost flexible budget variances

Variable manufacturing costs

A 10,000($12 - 11) = 10,000 U

B 6,000($20 - 18) = 12,000 U = $22,000 U

Variable marketing and administrative

A 10,000($1.10 - 1) = 1,000 U

B 6,000($1.10 - 1) = 600 U = $ 1,600 U

$23,600 U

6. Fixed cost flexible budget variance

Manufacturing 36,000 - 34,500 = 1,500 U

Mktg and admin 44,000 - 40,000 = 4,000 U $5,500 U



7. Budgeted net income $69,000

Industry volume variance $24,997 U

Market share variance 29,626 F

Profit volume variance (net) 4,629 F

Sales mix variance 2,129 U

Profit Volume Variance (gross) 2,500 F

Sales price variance $22,000 F

Variable cost flex. bud. var. $23,600 U

Fixed cost flex. bud. var. 5,500 U

Total profit variances $ 4,600U

Actual net income $ 64,400


APPENDIX BAPPENDIX BAPPENDIX BAPPENDIX B


Accounting for VariancesAccounting for Variances

Journal Entry for Purchase of Direct Materials

Materials (AQ x SP) 315,000

MPV (AP - SP)AQ 10,500

Accounts Payable (AQ x AP) 325,500

Rule: Unfavourable variances are recorded by a debit and favourable variances are recorded by a credit.


Accounting for Variances Accounting for Variances (continued)(continued)

Recording the Issuance of Materials to Production

Work in Process (SQ x SP) 300,000

MUV [(AQ - SQ)SP] 7,500

Materials (AQ x SP) 307,500

AQ = Actual quantity used in production



Recording the Direct Labour Costs

Work in Process (SH x SR) 240,000

LEV [(AH - SH) SR] 3,900

Accrued Payroll (AH x AR) 237,900

LRV [(AR - SR) AH] 6,000



Recording Variable Overhead


Manufacturing Applied (SQ x SP) 400,000

Manufacturing Overhead (Actual) 410,000

Various Accounts 410,000



Recording Fixed Overhead


Manufacturing Overhead Applied 320,000

Manufacturing Overhead (Actual) 300,000

Various Accounts 300,000



Recording O/H Variances and Closing the O/H Accounts

Manufacturing O/H Applied (Variable) 400,000

Manufacturing O/H Applied (Fixed) 320,000

OSV (Variable) 20,000

Manufacturing Overhead (Variable) 410,000

Manufacturing Overhead (Fixed) 300,000

OEV (Variable) 10,000

OSV (Fixed) 10,000

DV (Fixed) 10,000



Disposition of Overhead Variances

OEV (Variable) 10,000

OSV (Fixed) 10,000

DV (Fixed) 10,000

OSV (Variable) 20,000

Cost of Goods Sold 10,000

14-1 Copyright © 2004 by Nelson, a division of Thomson Canada Limited. Standard Costing: A...

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