Standard costingvariance analysiskaizen costingChapter 16

StandardsPredetermined amount for what should happenQuantity standardQuantity of the resource that should be consumedCost standardCost per unit that should be paid for the resourceProvides a context for evaluating actual amounts

StandardsAdvantagesProvides a context for evaluating actual amountsStandard costs do not fluctuateSimplified accountingLess expensive than actual costing

Setting standardsQuantity standardsHow much should be consumed?Product/process analysisAllowance for normal, unavoidable inefficienciesHistorical dataIs it still relevant?

Setting standardsCost standardsWhat should a unit of the resource cost?Normal qualityNormal quantityRegular supplierSame shipping methodEtc.

Setting standardsOther issuesWhat is normal?Practical or perfection?Who determines the standard?Who is most familiar with the usage?Who is most familiar with the cost?

Variance analysisComparison of standard to actual resultsQuantityMaterial quantity varianceLabor efficiency varianceCostMaterial cost varianceLabor rate variance

Variance analysisQuantity variance formulaStandard price * (actual standard quantity)Notice what is in the parenthesesCost variance formulaActual quantity * (actual standard cost)Notice what is in the parenthesesI pay for the actual amount I purchase

Variance analysisFavorable or unfavorable?Favorable if actual is less than standardImplies efficiency or cost savingsUnfavorable if actual is greater than standardImplies waste or excessive costDoes not mean good or badAny variance is a deviation from what was supposed to happen

Variance analysisResponsibilityWhy did the variance occur?Usage issueEfficiency or inefficiencyQuality issueDifferent material or labor mixQuantity issueDiscount or surcharge

Variance analysis

Variance analysis

Variance analysis

Variance analysis

Variance analysisMultiple substitutable inputsMultiple labor skills, multiple materialsQuantity (efficiency) variances can be broken down furtherMix varianceYield variance

Variance analysisMix varianceMix of inputs is different than standard

Difference between actual and standard proportions of the specific input*Total quantity of the resource class*Standard price of the specific input

Variance analysisYield varianceActual total quantity of inputs is different than standard

Difference between actual and standard quantity of the resource class*Standard input proportion of the specific resource*Standard price of the specific input

Variance analysis

Variance analysis

Variance analysis

Variance analysis

Variance analysisNow what?Investigation of variancesVariance sizeCost/benefit of analysisOffsetting variancesControllabilityInteractions and tradeoffsRecurring variances

Variance analysisCriticismsVariances can be too aggregatedWork best in stable, mass production environmentFocus on cost minimization, not qualitative issuesGreater automation reduces variancesStandards are often relevant for only a short time

Standard cost accountingUse of standard costs reduces period-to-period fluctuationsStandard costs are debited to inventory and CofGS accountsVariance is the difference between the debit to inventory and the creditVariances are closed to CofGS at end of periodFavorable variances decrease CoGSUnfavorable variances increase CofGS

Kaizen costingForm of continuous improvementProcessCost reduction goal is establishedActual costs are compared to goalActual cost achieved by year end becomes the base for next years reduction target