Standard Costing: A Managerial Control Tool Management Accounting: The Cornerstone for Business...

Standard Costing: A Managerial Control

Tool

Management Accounting: The Cornerstone for

Business Decisions

Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.

Learning Objectives

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

2. Explain 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 materials variances and explain how they are used for control.

Learning Objectives

5. Compute the labor variances and explain how they are used for control.

6. (Appendix 9A) Prepare journal entries for materials and labor variances.

7. (Appendix 9B) Define kaizen and target costing and explain their relationship to traditional standard costing.

What three ways are used to develop

standards?

Define Ideal and Currently Attainable

Standards◙ Ideal Standards

Demands maximum efficiency and is achievable only when everything operates perfectly. There are no breakdowns, slack, or skill failures.

◙ Currently Attainable StandardsAre achievable under efficient

operating conditions, but allowances are made for breakdowns, interruptions, some mistakes and so on.

Illustrate Types of Standards

Why have a standard cost system?

◙ It enhances planning and control and improves performance measurement

◙ Allows comparison of actual and budget and analysis of variances (differences)

◙ Broken down into price and efficiency variances

◙ Managers over inputs than prices◙ Standard cost systems are widely

used

Create a Table of Cost Assignment Approaches

Manufacturing Costs

Direct

materials

Directlabor

Overhead

Actual Costing Actual Actual Actual

Normal Costing Actual Actual Budgeted

Standard Costing Standard Standard Standard

How to compute standard quantities allowed (SQ & SH)

Assume that 200,000 packages of corn chips are produced during first week of April. The unit quantity standard is 18 ounces of yellow corn per package. The unit quantity standard for machine operators is 0.01 DLH per package produced.

REQUIRED: How much yellow corn and how many operator hours should have been used or the actual output of 200,000 packages?

Calculation:Corn allowed SQ = Unit quantity standard x Actual

output = 18 oz. x 200,000 = 3,600,000 oz.

Operator hours allowedSH = Unit labor standard x Actual

output = 0.01 DLH x 200,000 = 2,000 DLH

9-1

Brief Describe the Total Budget Variance, Price &

Efficiency Variance◙ The actual cost – The planned cost

= (AP x AQ) – (SP x SQ)It is also call the TOTAL VARIANCE

◙ The Price or Rate variance is the(Actual price – Standard Price) x Actual number of units used =(AP – SP) x AQ

◙ The Usage or Efficiency variance is the (Actual Quantity – Standard Quantity) x Standard Price = (AQ – SQ) x SP

Draw the General Variance Model

Total Variance(1 – 3)


1. AQ X AP(Actual Quantity

Of input at Actual Price)

1. AQ X AP(Actual Quantity

Of input at Actual Price)

3. SQ X SP(Standard Quantity

Of input at Standard Price)

3. SQ X SP(Standard Quantity

Of input at Standard Price)

2. AQ X SP(Actual Quantity

Of input atStandard Price)


Of input atStandard Price)

Price Variance(1 - 2)


Usage Variance(2 – 3)


How to use control limits to trigger a variance

investigationInformation: Standard costs: $100,000;

allowable deviation +10,000; actual costs for six months:

June $97,500 September $102,500July 105,000 October 107,500August 95,000 November 112,500Required: Plot the actual costs over time

against the upper and lower control lines. Determine when a variance should be investigated.

Calculation: Appears on the following two slides.

9-2

Decisions to Investigate9-2

Variance Investigation9-2

How to calculate the total variance for

materialsUnit standards from Exhibit 9-3; the actual

results from the first week of September are below:

Actual production 97,000 bags of corn chipsActual cost of corn1,560,000 oz. at $0.015 =

$23,400Actual cost of labor 720 hours at $8.35 = $6,012REQUIRED: Calculate the total variances for corn

and labor for the first week in September.Calculation: On the following slide

9-3


materials9-3

Actual Costs Budgeted Costs Total Variance

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

$ 23,400 $ 17,460 $ 5,940

Corn: SQ = 18 x 97,000 = 1,746,000 oz.

Corn: $0.01 x 1,746,000 = $17,460

Units standards from Exhibits 9-2, the actual results from the first week of September:

Actual production 97,000 bags of corn chips

Actual cost of corn 1,560,000 oz. @ $0.015

REQUIRED: Calculate the materials price and usage variances use the 3 pronged (columnar) and formula approaches.


materials9-4

Calculation: A. Formulas (recommended approach

for materials variances because materials purchases may differ from materials used.MPV = (AP – SP)AQ

= ($0.015 - $0.01)1,560,000 = $7,800 U

MUV = (AQ –SQ)SP = (1,560,000 – 1,746,000)$0.01 = $1,860 F


materials9-4


materials9-4


$7,800 U


$7,800 U


$1,860 F


$1,860 F


$5,940 U


$5,940 U

1. AQ X AP(Actual Quantityat Actual Price)

1,560,000 x $0.015 = $23,400

1. AQ X AP(Actual Quantityat Actual Price)

1,560,000 x $0.015 = $23,400

3. SQ X SP(Standard Quantityat Standard Price)

1,746,000 x$0.01 = $17,460

3. SQ X SP(Standard Quantityat Standard Price)

1,746,000 x$0.01 = $17,460


At Standard Price)1,560,000 x

$0.01 = $15,600


At Standard Price)1,560,000 x

$0.01 = $15,600

Discuss Using Materials Variance Information

◙ Responsibility for materials price variance◙ Usually with purchasing agents

◙ Analysis of materials price variance◙ Is it significant or not?

◙ Responsibility for the materials usage variance ◙ Usually production manager is

responsible◙ Analysis of materials usage variance

◙ Who is it assignable to?

How to calculate the total variance for labor9-5

Unit standards from Exhibit 9-3; the actual results from the first week of September are below:


Actual cost of labor 720 hours at $8.35 = $6,012

REQUIRED: Calculate the total variances for labor for the first week in September.

Calculation: On the following slide


materials9-5

Actual Costs Budgeted Costs Total Variance

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

$ 6,012 $ 7,760 $ 1,748

Labor: SQ = .01 x 97,000 = 970 hours

Labor: $8.00 x 970 = $7,760

Units standards from Exhibits 9-3, the actual results from the first week of September:


Actual cost of labor 720 hours @ $8.35REQUIRED: Calculate the labor rate and

efficiency variances use the 3 pronged (columnar) and formula approaches.

9-6

How to calculate the labor variances: formula & columnar approaches


Calculation: LRV = (AR – SR)AH

= ($8.35 - $8.00)720

= $252 ULEV = (AH –SH)SR

= (720 – 970)$8.00

= $2,000 F

9-6

Price Variance(1 - 2)$252 U

Price Variance(1 - 2)$252 U


$2,000 F


$2,000 F


$1,748 F


$1,748 F

1. AH X AR(Actual Quantityat Actual Price)720 x $8.35 =

$6,012

1. AH X AR(Actual Quantityat Actual Price)720 x $8.35 =

$6,012

3. SH X SR(Standard Quantityat Standard Price)

970 x $8.00 = $7,760

3. SH X SR(Standard Quantityat Standard Price)

970 x $8.00 = $7,760

2. AH X SR(Actual Quantity

At Standard Price)720 x $8.00 =

$5,760

2. AH X SR(Actual Quantity

At Standard Price)720 x $8.00 =

$5,760


9-6

Discuss Using Labor Variance Information

◙ Responsibility for labor rate variance◙ Determined primarily by external forces◙ Affected by unions, labor contracts and

seniority

◙ Analysis of labor rate variance◙ Responsibility for labor efficiency

variance◙ Managers are responsible for the

productive use of labor

◙ Analysis of labor efficiency variance

Standard Costing: A Managerial Control Tool Management Accounting: The Cornerstone for Business...

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