Standard Costing and Analysis of Direct Costs Chapter 10 McGraw-Hill/Irwin Copyright © 2014...
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Standard Costing and Analysis of Direct Costs Chapter 10 McGraw-Hill/Irwin Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Transcript of Standard Costing and Analysis of Direct Costs Chapter 10 McGraw-Hill/Irwin Copyright © 2014...
Standard Costing and Analysis of
Direct Costs
Chapter 10
McGraw-Hill/IrwinCopyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Managing CostsManaging Costs
Standardcost
Actualcost
Comparison between standard and actual
performancelevel
Costvariance
10-2
Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue
Should we usepractical standards
or perfection standards?
Practical standardsshould be set at levels
that are currentlyattainable with reasonable andefficient effort.
10-3
I agree. Perfection standards are
unattainable and therefore discouraging
to most employees.
Perfection versus Practical Perfection versus Practical Standards: A Behavioral IssueStandards: A Behavioral Issue
10-4
Standard Cost Variances
Cost Variance AnalysisCost Variance Analysis
Quantity VariancePrice Variance
The difference betweenthe actual price and the
standard price.
The difference betweenthe actual quantity andthe standard quantity.
10-5
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Materials price variance Materials quantity variance Labor rate variance Labor efficiency variance Variable overhead Variable overhead spending variance efficiency variance
AQ(AP - SP) SP(AQ - SQ)
AQ = Actual Quantity SP = Standard Price AP = Actual Price SQ = Standard Quantity
10-6
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard price is the amount that should have been paid for the resources acquired.
10-7
A General Model for Variance A General Model for Variance Analysis Analysis
Actual Quantity Actual Quantity Standard Quantity × × × Actual Price Standard Price Standard Price
Price Variance Quantity Variance
Standard quantity is the quantity that should have been used.
10-8
Significance of Cost VariancesSignificance of Cost Variances
1. Size of variance1. Dollar amount2. Percentage of
standard
2. Recurring variances3. Trends4. Controllability5. Favorable variances6. Costs and benefits
of investigation
What clues help me to determine the
variances that I should investigate?
10-9
If I buy cheaper materials, my direct-materials expenses will be lower than
what is budgeted. Then I’ll get my bonus. But we may lose customers because of
lower quality.
Behavioral Impact of Standard Behavioral Impact of Standard CostingCosting
10-10
Interaction among VariancesInteraction among Variances
I am not responsible for the unfavorable labor
efficiency variance!
You purchased cheapmaterial, so it took more
time to process it.
You used too much time because of poorly
trained workers and poor supervision.
10-11
Standard Costs and Product Standard Costs and Product CostingCosting
Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.
Standard material and labor costsare entered into Work-in-Process inventory instead of actual costs.
Standard cost variancesare closed directly toCost of Goods Sold.
Standard cost variancesare closed directly toCost of Goods Sold.
10-12
Advantages of Standard CostingAdvantages of Standard CostingManagement by
Exception
Stable Product Costs
Sensible CostComparisons
Advantages
PerformanceEvaluation
EmployeeMotivation
10-13
Criticisms of Standard CostingCriticisms of Standard CostingNot specific
Focus on cost minimization
Too aggregate, too late
DisadvantagesToo much focus on direct-labor
Narrow definition
Stable production required
Shorter life cycles
10-14
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
Unfavorable Favorablevariance variance
Direct-Material Price Variance
Actual quantity atactual cost
Accounts Payable
10-15
Unfavorable Favorablevariance variance
Direct-Material Quantity Variance
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Actual quantity atstandard cost
Raw-material Inventory
10-16
Unfavorable Favorablevariance variance
Direct-Labor Rate Variance
Actual quantity atactual cost
Wages Payable
Standard quantityat standard price
Work-in-Process Inventory
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Unfavorable Favorablevariance variance
Direct-Labor Efficiency Variance
10-17
Use of Standard CostsUse of Standard Costsfor Product Costingfor Product Costing
Unfavorable Favorablevariance variance
Cost of Goods Sold
10-18
