9 -1 Standard Costing: A Managerial Control Tool CHAPTER.

9 -1

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

CHAPTERCHAPTER

9 -2

1. Tell how unit standards are set and why standard costing systems are adapted.

2. State the purpose of a standard cost sheet.3. Describe the basic concepts underlying

variance analysis, and explain when variances should be investigated.

4. Compute the material and labor variances, and explain how they are used for control.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

ContinuedContinuedContinuedContinued

9 -3

5. Calculate the variable and fixed overhead variances, and give their definitions.

6. Appendix: Prepare journal entries for materials and labor variances, and show how to account for overhead variances.

ObjectivesObjectivesObjectivesObjectives

9 -4

Cost control often means the difference between

success and failure.

Cost control often means the difference between

success and failure.

9 -5

Why Standard Cost Systems Are Adopted

Standard costing systems enhance planning and control and improve performance measurement.

Standard costing systems facilitate product costing.

9 -6

Direct Direct

Materials Labor Overhead

Actual costing system Actual Actual Actual

Normal costing system Actual Actual Budgeted

Standard costing system Standard Standard Standard

Manufacturing Costs

9 -7

Standard Cost Sheet for Corn Chips

Standard Standard StandardPrice Usage Cost SubtotalDescription

Direct materials:Yellow corn $0.006 18 oz. $0.108Cooking oil 0.031 2 oz. 0.062Salt 0.005 1 oz. 0.005Lime 0.400 0.01 oz. 0.004Bags 0.044 1 bag. 0.044

Total direct materials $0.223

9 -8

Standard Cost Sheet for Corn Chips

Standard Standard StandardPrice Usage Cost SubtotalDescription

Direct materials $0.223Direct labor:

Inspectors $7.000 0.0070 hr. $0.049Machine operators 10.000 0.0008 hr. 0.008

Total direct labor 0.057Overhead:

Variable overhead 3.850 0.078 hr. $0.030Fixed overhead 32.050 0.0078 hr. 0.250

Total overhead 0.280Total standard unit cost $0.560

9 -9

During the first week of March, 100,000 packages of corn chips are produced.

During the first week of March, 100,000 packages of corn chips are produced.

The standard quantity of yellow corn meal per package is 18 ounces.

The standard quantity of yellow corn meal per package is 18 ounces.

9 -10

SQ = Unit quantity standard x Actual output

= 18 x 100,000

= 1,800,000 ounces

Standard Quantity of Materials Allowed

SH = Unit labor standard x Actual output

= 0.0008 x 100,000

= 80 direct labor hours

Standard Hours Allowed

9 -11

Total variance = Price variance + Usage variance

= (AP – SP)AQ + (AQ – SQ)SP

= [(AP x AQ) – (SP x AQ)]

+ [(SP x AQ) – (SP x SQ)]

= (AP x AQ) – (SP x AQ)]

+ (SP x AQ) – (SP x SQ)= (AP x AQ) – (SP x SQ)

9 -12 Variance Analysis: General Description

1. AP x AQ 1. AP x AQ (Actual Quantity (Actual Quantity of Input at Actual of Input at Actual Price)Price)

2. SP x AQ (Actual Quantity of Input at Standard Price)

3. SP x SQ 3. SP x SQ (Standard (Standard Quantity of Input Quantity of Input at Standard Price)at Standard Price)

Price Variance Price Variance (1-2)(1-2)

Budget Variance (1-3)

Usage Usage Variance (2-3)Variance (2-3)

9 -13

Favorable variances occur whenever the

opposite occurs.

Favorable variances occur whenever the

opposite occurs.

Unfavorable variances occur whenever actual

prices or usage of inputs are greater than standard

prices or usage.

Unfavorable variances occur whenever actual

prices or usage of inputs are greater than standard

prices or usage.

9 -14

Cost

Time

$110,000

$100,000

$ 90,000

x

x

x

x

x

x

9 -15

Variance Analysis: Materials and LaborVariance Analysis: Materials and LaborVariance Analysis: Materials and LaborVariance Analysis: Materials and Labor

Actual production 48,500 bags of corn chips

Actual cost of corn 780,000 ounces of $0.0069 = $5,382

Actual cost of inspection labor 360 hours at $7.35 = $2,646

Actual Costs Budgeted Costs Total VarianceActual Costs Budgeted Costs Total Variance

Corn $5,382.00 $5,238.00 $144.00 U

Inspection labor 2,646.00 2,376.50 269.50 U

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$558 F$558 FUsage Usage

VarianceVariance

$702 U$702 UPrice VariancePrice Variance

$144 U$144 UTotal VarianceTotal Variance

Variance Analysis: Columnar Approach

AQ x AP AQ x AP 780,000 x 0.0069 780,000 x 0.0069 $5,382$5,382

AQ x SPAQ x SP780,000 x $.0.0060780,000 x $.0.0060$4,680$4,680

SQ x SP873,000 x $0.0060$5,238

9 -17

MPV = (AP – SP)AQ

Material Price VarianceMaterial Price VarianceMaterial Price VarianceMaterial Price Variance

The actual The actual price per unitprice per unit

The standard The standard price per unitprice per unit

The actual The actual quantity of quantity of

material usedmaterial used

9 -18

MPV = (AP – SP)AQ


= ($0.0069 – $0.0060)780,000

= $0.0009 x 780,000

= $702 U

Percent of SP x SQ = $702/$4,680 = 15%Percent of SP x SQ = $702/$4,680 = 15%

9 -19

Direct Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage Variance

MUV = (AQ – SQ)SP

The actual The actual quantity of quantity of

materials usedmaterials used

The standard The standard quantity of quantity of materials materials

allowed for the allowed for the actual outputactual output

The standard The standard price per unitprice per unit

9 -20

MUV = (AQ – SQ)SP

Direct Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage VarianceDirect Materials Usage Variance

= (780,000 – 873,000)($0.006)

= 93,000 x $0.006

= $558 F

Percent of SQ x SP = $558/$5,238 = 10.7%

9 -21

LRV = (AR – SR)AH

The actual hourly wage

rate

The standard hourly wage

rate

The actual direct labor hours used

Labor Rate VariancesLabor Rate Variances Labor Rate VariancesLabor Rate Variances

9 -22

Labor Rate VariancesLabor Rate Variances Labor Rate VariancesLabor Rate Variances

LRV = (AR – SR)AH = ($7.35 – $7.00)360

= $0.35 x 360

= $126 U

Percent of SR x SH = $126/$2,520 = 5%

9 -23

$269.50 U$269.50 UTotal VarianceTotal Variance

Labor Variances: Columnar Approach

AH x AR 360 x $735 $2,646

AH x SRAH x SR360 x $7.00360 x $7.00$2,520$2,520

SH x SRSH x SR339.5 x $7.00339.5 x $7.00$2,376.50$2,376.50

$126 U$126 URate VarianceRate Variance

$143.50 UEfficiency Variance

9 -24

LEV = (AH – SH) SR

The actual direct labor hours used

The standard direct labor hours that

should have been used

The standard hourly wage

rate

Labor Efficiency VariancesLabor Efficiency Variances Labor Efficiency VariancesLabor Efficiency Variances

9 -25

Labor Efficiency VariancesLabor Efficiency Variances Labor Efficiency VariancesLabor Efficiency Variances

LEV = (AH – SH)SR = (360 – 339.5)$7

= 20.5 x $7

= $143.50 U

Percent of SH x SR = $143.50/$2,376.50 = 6%

9 -26

Variable Overhead Variances

Variable overhead rate (standard) $3.85/DLH

Actual variable overhead costs $1,600 Actual hours worked 400

Bags of chips produced 48,500

Hours allowed for production 373.3

Applied variable overhead $1,456

9 -27

$144 U$144 UTotal VarianceTotal Variance

$84 U$84 UEfficiency VarianceEfficiency Variance

$60 U$60 USpending Spending VarianceVariance

Variable Overhead Variances: Columnar Approach

Actual Actual VOVO

$1,600$1,600

VO Rate x VO Rate x Actual HoursActual Hours

$1,540$1,540

VO Rate x Standard Hours

$1,456

9 -28

VOSV = (AVOR x AH) – (SVOR x AH)

Variable Overhead Variable Overhead Spending VariancesSpending Variances

Variable Overhead Variable Overhead Spending VariancesSpending Variances

= (AVOR – SVOR)AH

= ($4.00 – $3.85)400

= $60 U

9 -29

Crunch Chips, Inc.Crunch Chips, Inc.Flexible Budget Performance ReportFlexible Budget Performance ReportFor the Week Ended March 8, 2004For the Week Ended March 8, 2004

Cost Cost FormulaFormula

Actual Actual CostsCosts BudgetBudget

Spending Spending VarianceVariance

Gas $3.00 $1,190 $1,200 $10 F

Electricity 0.78 385 312 73 U

Water 0.07 25 28 3 F

Total cost $3.85 $1,600 $1,540 $60 U

9 -30

Crunch Chips, Inc.Performance Report

For the Week Ended March 8, 2004

Cost Cost FormulaFormula

Actual Actual CostsCosts BudgetBudget

Spending Spending VarianceVariance

Gas $3.00 $1,190 $1,200 $10 F

Electricity 0.78 385 312 73 U

Water 0.07 25 28 3 F

Total cost $3.85 $1,600 $1,540 $60 U

Budget Budget for for

Standard Standard HoursHours

EfficiencyEfficiencyVarianceVariance

$1,135 $65 U

295 17 U

26 2 U

$1,456 $84 U

9 -31

Fixed Overhead Variances

Budgeted fixed overhead $749,970

Practical activity 23,400 direct labor hours

Standard fixed overhead rate $32.05

Hours allowed to produce 3,000,000 bags of chips: 0.078 x 3,000,000 = $23,400

Budgeted or Planned Items

Actual Results

Actual production 2,750,000 bags of chips

Actual fixed overhead cost $749,000

Standard hours allowed for actual production 21,450

9 -32

Total Fixed Overhead Variances

Applied fixed overhead

Standard fixed overhead rate x Standard hours

=

= $32.05 x 21,450

= $687,473 (rounded)

Total fixed overhead variance

$749,000 – $687,473=

= $61,527 underapplied

9 -33

$61,527 U$61,527 UTotal VarianceTotal Variance

$970 F$970 FSpending Spending VarianceVariance

Fixed Overhead Variances: Columnar Approach

Actual FO$749,000

Budgeted FOBudgeted FO$749,970$749,970

Applied FOApplied FO$687,473$687,473

$62,497 UVolume Variance

9 -34

Crunch Chips, Inc.Performance Report

For the Year Ended 2004

Actual Actual CostsCosts

Budgeted Budgeted CostCost VarianceVariance

Depreciation $530,000 $530,000 $ ----

Salaries 159,370 159,970 600 F

Taxes 50,500 50,000 500 U

Insurance 9,130 10,000 870 F

Total fixed overhead $749,000 $749,970 $970 F

Fixed Fixed Overhead ItemsOverhead Items

9 -35

Volume Variance

Volume variance = $32.05(23,400 – 21,450)

= ($32.05 x 23,400) – ($32.05 x 21,450)

= $749,970 – $687,473

= Budgeted fixed overhead – Applied fixed overhead

= $62,497 U

9 -36

Appendix: Accounting for

Variances

9 -37

The actual price is $0.0069 per ounce of corn and standard price is $0.0060, and 780,000 ounces of corn are purchased.

The actual price is $0.0069 per ounce of corn and standard price is $0.0060, and 780,000 ounces of corn are purchased.

The receiving report and the invoice are used to record the receipt of the

merchandise and to control the payment.

Materials Inventory 4 680 00

Materials Price Variance 702 00

Accounts Payable

5 382 00


9 -38

During the period 780,000 ounces of corn is placed into production. The

standard quantity is 873,000 ounces, and standard price is $0.006.

During the period 780,000 ounces of corn is placed into production. The

standard quantity is 873,000 ounces, and standard price is $0.006.



Work in Process 5 238 00

Materials Usage Variance 558 00

Materials Inventory 4 680 00

Material Usage VarianceMaterial Usage VarianceMaterial Usage VarianceMaterial Usage Variance

9 -39

During the period the firm has 360 actual inspection hours, while the standard hours for the units produced is 339.5 hours. The

actual rate is $7.35 per hour while the standard rate is $7.00 per hour.

During the period the firm has 360 actual inspection hours, while the standard hours for the units produced is 339.5 hours. The

actual rate is $7.35 per hour while the standard rate is $7.00 per hour.



Work in Process 2 376 00

Labor Efficiency Variance 143 50

Labor Rate Variance 126 00

Accrued Payroll

2 646 00

Labor VariancesLabor VariancesLabor VariancesLabor Variances

9 -40

At the end of the year, the variances for materials and labor are usually closed to

Cost of Goods Sold.


Cost of Goods Sold.



Cost of Goods Sold 971 50

Material Price Variance 702 00

Labor Efficiency Variance 143 50

Labor Rate Variance 126 00

Closing VariancesClosing VariancesClosing VariancesClosing Variances

9 -41


Cost of Goods Sold.


Cost of Goods Sold.



Material Usage Variance 558 00

Cost of Goods Sold 558 00

Closing VariancesClosing VariancesClosing VariancesClosing Variances

9 -42

The EndThe EndThe EndThe End

Chapter NineChapter Nine

9 -1 Standard Costing: A Managerial Control Tool CHAPTER.

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