Using Variances under Standard Cost System ACG 2071 Module 10 Chapter 22 Fall 2007.
-
Upload
egbert-mccormick -
Category
Documents
-
view
215 -
download
0
Transcript of Using Variances under Standard Cost System ACG 2071 Module 10 Chapter 22 Fall 2007.
Standards Are performance goals. Service, merchandising, and manufacturing
businesses may all use standards to evaluate and control operations.
Manufacturers normally use standard costs for each of the three manufacturing costs Direct materials Direct labor Factory overhead
Standard Cost Systems Accounting systems that use standards for these
costs are called standard cost systems. Management determines how much a product should
cost – Standard Cost How much it does cost – Actual Cost The causes of any differences – Variances When actual costs are compared with standard costs,
only the exceptions or variances are reported for cost control. Called Principle of Exceptions.
Standard costs assists management in controlling costs and in motivating employees to focus on costs.
Types of Standards Theoretical or ideal standards – achieved
only under perfect conditions Currently attainable or normal standards –
attained with reasonable effort
Budgetary Performance Evaluation When using standard cost system, direct
materials, direct labor, and factory overhead are separated into two components A price standard A quantity standard
Example Assume that Halycon Balloons produced and sold 5,000 hot air balloons.
It incurred direct material costs of $40,150, direct labor costs of $38,500, and factory overhead costs of $22,400. The standard costs for the company are listed below:
Manufacturing Costs
Standard Price Standard Quantity per
unit
Standard Cost per
Unit
Direct materials $5.00 per yard 1.5 yards $7.50
Direct labor $9.00 per hour 0.80 hour per unit $7.20
Factory overhead $6.00 0.80 hour per unit $4.80
Total standard cost per unit
$19.50
Budget Performance ReportManufacturing Costs
Actual Costs Standard Costs at Actual Volume
Cost Variance (Favorable) Unfavorable
Direct materials $40,150 $37,500 $2,650
Direct labor $38,500 $36,000 $2,500
Factory overhead
$22,400 $24,000 ($1,600)
Total standard cost per unit
$101, 050 $97,500 $3,550
Budget Performance Report Favorable cost variance occurs when the
actual cost is less than the standard cost Unfavorable variance occurs when the
actual cost is greater than the standard cost
Direct Materials Variance
Price variance = (Actual price – Standard Price) X Actual Quantity
Quantity variance = (Actual Quantity – Standard Quantity) X Actual Price
Total Direct Materials Variance = Quantity Variance + Price Variance
Example Material used in the production of Z
Cleaner has a standard cost of $3 per lb. and standard use of 10,000 lbs. Actual records show 15,000 lbs were used with an actual cost of $2.50 per lb. Compute the direct material variances.
ExamplePrice Variance = (Actual Price – Standard Price) X Actual Quantity = ($2.50 – $3) X 15,000 lbs = -$0.50 X 15,000 lbs = -$7,500 favorable
Quantity Variance = (Actual Quantity – Standard Quantity) X Standard Price
= (15,000 lbs – 10,000 lbs) X $3.00 = 5,000 lbs x $3.00 = $15,000 UnfavorableTotal direct materials variance = Quantity variance + Price variance = $15, 000 + (-$7,500) = $7,500 Unfavorable
Direct Labor Variance
Rate variance = (Actual Rate – Standard Rate) X Actual Hours
Time variance = ( Actual Hours – Standard Hours) X Actual Rate
Total Direct Labor Variance = Time Variance + Rate Variance
Example Example 4: Factory records show that
each product produced requires 3 direct labor hours. Production during the period consisted of 10,000 units with 29,500 hours of labor used. Labor has a standard cost of $10 per hour and actual cost was $11 per hour. Compute the direct labor variances.
Example
Rate Variance = (Actual Rate – Standard Rate) X Actual hours
= ($11 - $10) X 29,500 hours
= $29,500 Unfavorable
Example
Time Variance = (Actual hrs – Standard hrs) X Standard rate
= [29,500 hrs – ( 3 x 10,000)] x $10
= -500 hours x $10
= -$5,000 Favorable
Example
Total Direct labor variance = Rate variance + Time variance = $29,500 + (-$5,000) = $24,500 Unfavorable
Factory Overhead Variance Determine the impact of changing production on
fixed and variable factory overhead cost. Variances from standard for factory overhead
cost result from: Actual variable factory overhead cost greater or less
than budgeted variable factory overhead for actual production
Controllable variance for variable factory overhead Actual production at a level above or below 100% of
normal capacity. Volume variance for fixed factory overhead
Example Percent of normal capacity 80% 90% 100% 110%
Units produced 5,000 5,625 6,250 6,875
Direct labor hours ( .8 per unit) 4,000 4,500 5,000 5,500
Budgeted factory overhead
Variable costs:
Indirect factory wages $8,000 $9,000 $10,000 $11,000
Power and light 4,000 4,500 5,000 5,500
Indirect materials 2,400 2,700 3,000 3,300
Total variable cost $14,400 $16,200 $18,000 $19,800
Fixed costs:
Supervisory salaries $5,500 $5,500 $5,500 $5,500
Depreciation 4,500 4,500 4,500 4,500
Insurance 2,000 2,000 2,000 2,000
Total fixed cost $12,000 $12,000 $12,000 $12,000
Total factory overhead $26,400 $28,200 $30,000 $31,800
Controllable VarianceControllable Variance
Deals with variable cost
Actual variable factory overhead-Budgeted variable factory overhead* Controllable Variance
*at actual production level
Example Halycon produced 5,000 balloons and each
unit required 0.80 standard labor hour for production. Actual variable factory overhead was $10,400 and fixed factory overhead was $12,000 Using the information on Halycon Balloons, compute the controllable variance.
Standard direct labor hours5,000 units produced x 0.80 per hour = 4,000 direct labor
Based on units produced
Variable costs per unit Variable costs per unit
= Total variable factory overhead Total hours
= $18,000 = $ 3.60 per hour5,000
Budgeted Variable Factory Overhead Standard direct labor hours for units produced
x Standard variable factory overhead per DLHBudgeted variable factory overhead
= 4,000 hours x $3.60 = $14,400
Controllable VarianceActual variable factory overhead $16,000Budgeted variable factory overhead 14,400Controllable variance $1,600 UNFAVORABLE
Volume Variance – Fixed costs
100% capacity direct labor hours-Standard direct labor hours at actualCapacity not usedX standard fixed overhead rate
Volume variance
Example : Using the information on Halycon Balloons,
assume actual production at 80% capacity. Compute the volume variance.
From the factory overhead cost budget, we compute:
Fixed costs per unit = Total fixed factory overhead
Total hours
= $12,000 = $ 2.40 per hour 5,000 based on 100% capacity