Chapter 7: Standard Costing and Variance Analysis

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Chapter 7:Standard Costing and Variance Analysis

Cost Accounting: Foundations & Evolutions, 9e

Kinney and Raiborn


Learning Objectives Why are standard cost systems used? How are material, labor, and overhead standards set? How are material, labor, and overhead variances

calculated and recorded? How have the setting and use of standards changed

over time? How does the use of a single conversion element

(rather than the traditional labor and overhead elements) affect standard costing?

(Appendix) How are variances affected by multiple material and labor categories?


Why Use Standard Cost SystemsA standard cost system tracks both standard and actual costs. This dual recording provides an essential element to cost control: having norms against which actual operations can be compared. Motivating Planning Controlling - variance analysis Clerical efficiency Decision making Performance evaluation


Setting Standards Appropriateness Attainability

Expected standards Practical standards Ideal standards


Standards Standard costs are budgeted costs to

manufacture a single unit of product, or perform a single service

To develop standards, identify material and labor types, quantities, and prices overhead types and behavior


Material Standards Materials used

Types Quality Quantity Price

From Product specifications, observation, inquiry Bill of materials

Balance cost, quality, and projected sales price


Labor Standards Labor used

Types Production, setup, cleanup, and rework

Quantity Cost

Include wages, payroll taxes, and fringe benefits From

Industrial engineering studies including methods-time measurement (MTM), time and motion studies, and historical data

Operations flow document


Overhead Standards Variable and fixed manufacturing

overhead Estimated level of activity Estimated costs Predetermined factory overhead

application rates


SP x SQAP x AQ

Total Variance

Total Variance

AP = actual cost/price per unit of materials or hours of labor

AQ = actual quantity of materials or hours of laborSP = standard cost/price per unit of materials or hours of laborSQ = standard quantity of materials or hours of labor

Inputs Outputs


Material Price Variance (MPV)

AP x AQ SP x SQ

Total Variance

SP x AQ

MPV

(AP - SP) x AQ*

*Favorable or unfavorable

What was paid

What shouldhave been

paid


Material Price Variance

Calculate Material Price Variance at point of purchase, or when materials used


Material Quantity Variance (MQV)

AP x AQ SP x SQ

Total Variance

SP x AQ

MQV

(AQ - SQ) x SP*


What shouldhave beenused for

level of output

What wasused


Labor Rate Variance (LRV)

AP x AQ SP x SQ

Total Variance

SP x AQ

LRV

(AP - SP) x AQ*


What was paid

What shouldhave been

paid


Labor Efficiency Variance (LEV)

AP x AQ SP x SQ

Total Variance

SP x AQ

LEV

(AQ - SQ) x SP*


What shouldhave beenused for

level of output

What wasused


Variable Overhead Variances

What should have beenused for level of output

For actual hoursused

VOH Spending Variance

VOH Efficiency Variance

Total VOH Variance

SP x SQSP x AQ

Actual VOH

Budgeted VOH

Applied VOH

Actual


VOH Spending Variance Caused by price differences

managers have little control over prices

Caused by shrinkage or waste managers should be held

accountable


Fixed Overhead Variances

SP x SQ

Actual FOH

Budgeted FOH

Applied FOH

FOH Spending Variance

FOH Volume Variance

Total FOH VarianceWhat should have beenused for level of output

ConstantAmount


FOH Spending Variance Calculate variance for each component Caused by price differences May reflect mismanagement of

resources


FOH Volume Variance

Calculate variance for each component Measures capacity utilization Caused by producing at a level that differs

from the capacity level used to compute the predetermined overhead rate

Also called the noncontrollable variance


Questions

Why are standard cost systems used? How are standards set for material, labor,

and overhead? How are material, labor and overhead

variances calculated and recorded?


Potential Ethical Issues Setting high standards to create favorable variances Ignoring effects of one production area on another Setting overhead rates too low based on high

production levels to distort inventory cost and operating income

Producing inventory only to create a favorable volume variance

Not updating standards so that favorable variances are created

Using low quality materials or labor to create favorable variances and low quality products

Chapter 7: Standard Costing and Variance Analysis

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