CHAPTER 19: Standard Costs, Variable Costing Systems, Quality Costs

and Joint Costs

MBA 206

Maria Arlene (Bam) T. Disimulacion

STANDARD COST

STANDARD COST

• Measure of how much an item of cost should be

• The sum of standard costs of the inputs – direct material, direct labor and overhead – is the standard cost of one unit of output

STANDARD COST

• May be used in the process type of production or the job order type of production

• May be used for each department (cost center) or in some departments only (and actual costs in others)

USES of STANDARD COSTS

• Provides a basis for controlling performance

Basis of comparison between actual and standard costs

• Provides cost information useful for decision-making

Provides the best available approximation of relevant costs

USES of STANDARD COSTS

• Provides a more rational measurement of inventory and COGS

Records the same costs for physically identifiable units (irrespective of other costs)

• Reduces the cost of record-keeping

Post standard unit material cost instead of individual costs

STANDARD COST and BUDGETED COST

• Standard Cost: Refers to what the cost of one unit of product should be

• Budgeted Cost: Refers to what the total cost of many units (or over a time period) should be

ESTABLISHMENT OF STANDARDS

• Motion and time studies

• Review of direct materials and productive equipment to achieve maximum productivity

• Joint efforts of accounting, engineering, personnel administration and other managerial areas

STANDARD COST SYSTEM

• Cost systems employing detailed estimates of each element of manufacturing cost entering into the finished product

• Helps management determine:

How much a product should cost? (Standard)

How much is does cost? (Actual)

Causes of differences between the two costs? (Variances)

VARIANCES

• Favorable: A favorable variance tells management that if everything else stays constant, the actual profit will likely exceed the planned profit.

Actual Cost < Standard Cost

• Unfavorable: An unfavorable variance tells management that if everything else stays constant, the company's actual profit will be less than planned.

Actual Cost > Standard Cost

VARIANCES

Input for Product Variance #1 Variance #2

Direct Material Price (or cost) Usage (or quantity)

Direct Labor Rate (or cost)Efficiency (or

quantity)

Manufacturing Overhead (Variable)

Spending Efficiency

Manufacturing Overhead(Fixed)

Budget Volume

MATERIALS PRICE VARIANCE

Entry #1 (page 589)

Actual Price per unit $ 52,000

Less: Standard Price per unit 54,000

Materials Price Variance - (Favorable) $ 2,000

MATERIALS USAGE VARIANCE

Entry #2 (page 589)

Actual Quantity $ 48,000

Less: Standard Quantity 49,000

Materials Usage Variance - (Favorable) $ 1,000

PRINCIPLE OF EXCEPTIONS

• Only variances are reported to the individual (or department) responsible

• Ensures that the individual (or department) concentrates of the cause and correction of the variance

VARIABLE COSTING

and

ABSORPTION COSTING

VARIABLE COSTING ABSORPTION COSTING

Cost of Goods Manufactured

COGS is composed only of variable manufacturing costs

All manufacturing costs are included in Finished Goods and remain there as an asset until the goods are sold

Costs Direct materials Direct labor Variable Factory

overhead costs (vary with the rate of production)

Direct Materials Direct labor Variable Factory

Overhead Fixed Factory Overhead

VARIABLE COSTING ABSORPTION COSTING

Controlling Costs Useful for management for various levels of management in their review of controllable and noncontrollable costs

Useful in determining historical costs for financial reporting to external users and for tax reporting

Pricing Products Provide data on the relationship between selling price, fixed costs and income

Provide data on required selling price to cover all costs and provide reasonable income

USES of VARIABLE COSTING and ABSORPTION COSTING

VARIABLE COSTING ABSORPTION COSTING

Planning Production

Helps with short-term decisions when there are opportunities for additional income (but with additional variable costs)

Helps with long-term decisions affecting fixed costs

Analyzing Market Segments

Determines the profit contribution by each segment (salesman, territory, product, customer distribution channel)

Helps with long-term decisions affecting fixed costs

USES of VARIABLE COSTING and ABSORPTION COSTING

QUALITY COSTS

COST OF QUALITY

Costs associated with:

• Controlling quality ( Appraisal Costs or Prevention Costs)

• Failing to control quality (Internal Failure Costs or External Failure Costs)

PREVENTION COSTS (Also called Quality Prevention Costs)

Costs of activities that prevent defectsfrom occurring in the design and delivery of products and services

Examples of prevention activities:• Quality engineering• Design engineering• Assessing vendor quality• Operator training• Preventive machine maintenance

QUALITY APPRAISAL COSTS (Also called Detection Costs)

• Costs of activities that detect, measure, evaluate, and inspect products and processes to ensure that they meet customer needs

• Related to testing and inspection activities

• Only reduces the amount of poor quality products that reach the customers

INTERNAL FAILURE COSTS

Costs associated with defects discovered

by a business before the product or service is delivered

Examples:• Cost of scrap and rework• Lost equipment time due from

producing scrap• Supervision to move, record and

dispose of scrap• Procurement time to repurchase parts

that are defective

EXTENAL FAILURE COSTS

Costs incurred after defective units/services have been delivered to

customers

Are external because the defects are discovered while products are in use

Examples:• Field repairs• Recalls• Warranty work• Correcting invoice errors• Processing returned merchandise

JOINT COSTS

JOINT PRODUCTS

When two or more commodities of significant value are produced from a single principal direct material

Examples: Gasoline, kerosene, paraffin and other related commodities emerging from the processing of crude oil

JOINT COSTS

Costs incurred in the manufacture of joint

products

SALES VALUE METHOD

A method of allocating joint costs based on the assignment of costs

to the various products in accordance with their relative sales values.

SALES VALUE METHOD

Joint Products

Units Produced

Sales Value/Unit

Total Sales Value

Joint Costs

X 10,000 units $3/unit $30,000

Y 50,000 units $1.20/unit $60,000

$63,000

Total Sales Value $90,000

Allocation of Joint Costs

X = $30,000/90,000 x 63,000 $21,000

Y = $60,000/90,000 x 63,000 $42,000

SALES VALUE METHOD

Joint Products

Units Produced

Sales Value/Unit

Total Sales Value

Joint Costs

X 10,000 units $3/unit $30,000

Y 50,000 units $1.20/unit $60,000

$63,000

Total Sales Value $90,000

Allocation of Joint Costs

X = $30,000/90,000 x 63,000 $21,000

Y = $60,000/90,000 x 63,000 $42,000

Unit Cost

X = $21,000/ 10,000 units $2.10

Y = $42,0000/ 50,000 units $0.84

SALES VALUE METHOD

Joint Products

Units Produced

Sales Value/Unit

Total Sales Value

Addl Mktg & Prod Costs

(Costs Beyond the Split-Up)

TSV – Addl Costs

A 200 units $10/unit $2,000 $600 $1,400

B 300 units $20/unit $6,000 $1,500 $4,500

Total Sales Value $8,000 $5,900

Joint Costs (up to Split-Off) $3,000

SALES VALUE METHOD

Joint Products

Units Produced

Sales Value/Unit

Total Sales Value

Addl Mktg & Prod Costs

TSV – Addl Costs

A 200 units $10/unit $2,000 $600 $1,400

B 300 units $20/unit $6,000 $1,500 $4,500

Total Sales Value $8,000 $5,900

Joint Costs (up to Split-Off) $3,000

Allocation of Joint Costs

A = $1,400/5,900 x 3,000 $712

B = $4,500/5,900 x 3,000 $2,288

SALES VALUE METHOD

Joint Products

Units Produced

Sales Value/Unit

Total Sales Value

Addl Mktg & Prod Costs

TSV – Addl Costs

A 200 units $10/unit $2,000 $600 $1,400

B 300 units $20/unit $6,000 $1,500 $4,500

Total Sales Value $8,000 $5,900

Joint Costs (up to Split-Off) $3,000

Allocation of Joint Costs

A = $1,400/5,900 x 3,000 $712

B = $4,500/5,900 x 3,000 $2,288

Unit Costs for each productA = $712/ 200 units $3.56 $600/ 200 units 3.00 Unit Cost $6.56

B = $2,288/300 units $7.63 $1,500/300 units 5.00 Unit Cost $12.63

THANK YOU

Maria Arlene (Bam) T. Disimulacion