Accounting Slides

Chapter 9
Standard Costs
McGraw-Hill /Irwin
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
8-2
Standard Costs
Standards are benchmarks or norms for measuring performance. Two types of standards are commonly used.
Quantity standards specify how much of an input should be used to make a product or provide a service. Cost (price) standards specify how much should be paid for each unit of the input.
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Standard Costs
Deviations from standard deemed significant are brought to the attention of management, a practice known as management by exception.
Amount
Standard Direct Material
Direct Labor
Manufacturing Overhead
Type of Product Cost
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Variance Analysis Cycle

Identify questions Receive explanations
Take corrective actions
Analyze variances
Conduct next periods operations Prepare standard cost performance report
Begin
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Setting standards for Direct Materials & Direct Labor
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Setting Standard Costs

Accountants, engineers, purchasing agents, and production managers combine efforts to set standards that encourage efficient future production.
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Setting Direct Material Standards

Price Standards
Std: Ideal + Practical
Quantity Standards
Final, delivered cost of materials, net of discounts.
Summarized in a Bill of Materials. Includes: allowance for unavoidable waste, spoilage, and other normal inefficiencies.
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Setting Direct Labor Standards

Rate Standards
Time Standards
The standard rate per hour for direct labor includes not only wages earned, but also fringe benefits and other labor costs.
Use time and motion studies for each labor operation.
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Setting Variable Overhead Standards

Price Standards Quantity Standards
The rate is the variable portion of the predetermined overhead rate.
The activity is the base used to calculate the predetermined overhead (usually DLH or MH).
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Standard Cost Card
A standard cost card for one unit of product might look like this:
A
Standard Quantity or Hours
3.0 lbs. 2.5 hours 2.5 hours
B
Standard Price or Rate
AxB
Standard Cost per Unit
12.00 35.00 7.50 54.50
Inputs
Direct materials Direct labor Variable mfg. overhead Total standard unit cost
$ 4.00 per lb. $ 14.00 per hour 3.00 per hour $
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Standards vs. Budgets
Are standards the same as budgets? A budget is set for total costs.
A standard is a per unit cost. Standards are often used when preparing budgets.
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Price and Quantity Standards

Price and quantity standards are determined separately for two reasons:
The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.
The buying and using activities occur at different times.
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A General Model for Variance Analysis
Variance Analysis
Price Variance
Quantity Variance
Difference between actual price and standard price
Difference between actual quantity and standard quantity
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Variance Analysis
Price Variance
Quantity Variance
Materials price variance Labor rate variance VOH spending variance
Materials quantity variance Labor efficiency variance VOH efficiency variance
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Actual Quantity Actual Price
Actual Quantity Standard Price
Standard Quantity Standard Price
Price Variance
Quantity Variance
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Price Variance
Quantity Variance
Actual quantity is the amount of direct materials, direct labor, and variable manufacturing overhead actually used.
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Price Variance
Quantity Variance
Standard quantity is the standard quantity allowed for the actual output for the period.
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Price Variance
Quantity Variance
Actual price is the amount actually paid for the input used.
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Price Variance
Quantity Variance
Standard price is the amount that should have been paid for the input used.
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Price Variance
(AQ AP) (AQ SP) SP)
AQ = Actual Quantity AP = Actual Price
Quantity Variance
(AQ SP) (SQ
SP = Standard Price SQ = Standard Quantity
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Direct Material
1) Computing -DM Price Variance -DM Quantity Variances
2) Explaining their significance
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Material Variances Example
Co.A has the following direct material standards for the fiberfill in its mountain parka.
0.1 kg. of fiberfill per parka at $5.00 per kg.
Last month, 210 kgs of fiberfill were purchased and used to make 2,000 parkas. The material cost a total of $1,029.
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Material Variances Summary

Actual Quantity Actual Price 210 kgs. $4.90 per kg. Actual Quantity Standard Price 210 kgs. $5.00 per kg. Standard Quantity Standard Price 200 kgs. $5.00 per kg.
= $1,029
= $1,050
= $1,000
Price variance $21 favorable
Quantity variance $50 unfavorable
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= $1,029
= $1,050
= $1,000

$1,029 210 kgs = $4.90 per kg
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= $1,029
= $1,050
= $1,000

0.1 kg per parka 2,000 parkas = 200 kgs
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Material Variances: Using the Factored Equations

Materials price variance
MPV = AQ (AP - SP) = 210 kgs ($4.90/kg - $5.00/kg) = 210 kgs (-$0.10/kg) = $21 F
Materials quantity variance

MQV = SP (AQ - SQ) = $5.00/kg (210 kgs-(0.1 kg/parka 2,000 parkas)) = $5.00/kg (210 kgs - 200 kgs) = $5.00/kg (10 kgs) = $50 U
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Responsibility for Material Variances

Materials Quantity Variance Materials Price Variance
Production Manager
Purchasing Manager
The standard price is used to compute the quantity variance so that the production manager is not held responsible for the purchasing managers performance.
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Your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances.
I am not responsible for this unfavorable material quantity variance. You purchased cheap material, so my people had to use more of it.
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The materials variances are not always entirely controllable by
one person or department.
For example, the production manager may
schedule production in such a way that it requires express delivery of raw materials, which causes the DM to be purchased at a higher price than expected, resulting in an unfavorable materials price variance. The purchasing manager may purchase cheaper lower quality raw materials, which leads to using more DM, due to waste and spoilage, resulting in an unfavorable materials quantity variance for the production manager.
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Quick Check
Product A
Hanson Inc. has the following direct materials standard to manufacture 1 unit of product A: 1.5 pounds per 1 unit at $4.00 per pound Last week, 1,700 pounds of material were purchased and used to make 1,000 units. The material cost a total of $6,630.
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Quick Check
Hansons material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable. d. $800 favorable.
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Quick Check
Hansons material price variance (MPV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 unfavorable.= AQ(AP - SP) MPV MPV d. $800 favorable. = 1,700 lbs. ($3.90 4.00) MPV = $170 Favorable
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Quick Check
Hansons material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 favorable. d. $800 unfavorable.
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Quick Check
Hansons material quantity variance (MQV) for the week was: a. $170 unfavorable. b. $170 favorable. c. $800 favorable. d. $800 unfavorable.
MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable
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Quick Check

1,700 lbs. $3.90 per lb. = $6,630

1,700 lbs. $4.00 per lb. = $ 6,800

1,500 lbs. $4.00 per lb. = $6,000
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Quick Check Continued
Hanson Inc. has the following materials standard to manufacture 1 unit of product A: 1.5 pounds per unit at $4.00 per pound Last week, 2,800 pounds of material were purchased at a total cost of $10,920, and 1,700 pounds were used to make 1,000 units.
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Actual Quantity Purchased Actual Price 2,800 lbs. $3.90 per lb. = $10,920 Actual Quantity Purchased Standard Price 2,800 lbs. $4.00 per lb. = $11,200 Price variance increased because quantity purchased increased.
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Actual Quantity Used Standard Price 1,700 lbs. $4.00 per lb. = $6,800 Quantity variance is unchanged because actual and standard quantities are unchanged.
Standard Quantity Standard Price 1,500 lbs. $4.00 per lb. = $6,000
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Direct Labor
1) Computing:
-DL Rate variance

-Efficiency variance 2) Explaining their significance
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Labor Variances Example
Co. A has the following direct labor standard for its mountain parka.
1.2 standard hours per parka at $10.00 per hour Last month, employees actually worked 2,500 hours at a total labor cost of $26,250 to make 2,000 parkas.
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Labor Variances Summary

Actual Hours Actual Rate 2,500 hours $10.50 per hour Actual Hours Standard Rate 2,500 hours $10.00 per hour. Standard Hours Standard Rate 2,400 hours $10.00 per hour
= $26,250
= $25,000
= $24,000
Rate variance $1,250 unfavorable
Efficiency variance $1,000 unfavorable
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= $26,250
= $25,000
= $24,000

$26,250 2,500 hours = $10.50 per hour
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= $26,250
= $25,000
= $24,000
1.2 hours per parka 2,000 parkas = 2,400 hours
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Labor Variances: Using the Factored Equations

Labor rate variance
LRV = AH (AR - SR) = 2,500 hours ($10.50 per hour $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable
Labor efficiency variance

LEV = SR (AH - SH) = $10.00 per hour (2,500 hours 2,400 hours) = $10.00 per hour (100 hours) = $1,000 unfavorable
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Responsibility for Labor Variances

Production managers are usually held accountable for labor variances because they can influence the:
Mix of skill levels assigned to work tasks.

Level of employee motivation. Quality of production supervision. Quality of training provided to employees.
Production Manager
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I think it took more time to process the materials because the Maintenance Department has poorly maintained your equipment.
I am not responsible for the unfavorable labor efficiency variance! You purchased cheap material, so it took more time to process it.
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However, labor variances are not entirely
controllable by one person or department. For example: The Maintenance Department may do a poor job of maintaining production equipment. If this increases the processing time required per unit, it will cause an unfavorable labor efficiency variance. The purchasing manager may purchase lower quality raw materials resulting in an unfavorable labor efficiency variance for the production manager.
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Quick Check
Hanson Inc. has the following direct labor standard to manufacture 1 unit of product A: 1.5 standard hours per unit at $12.00 per direct labor hour Last week, 1,550 direct labor hours were worked at a total labor cost of $18,910 to make 1,000 units.
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Quick Check
Hansons labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. c. $300 unfavorable. d. $300 favorable.
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Quick Check
Hansons labor rate variance (LRV) for the week was: a. $310 unfavorable. b. $310 favorable. LRV = AH(AR - SR) c. $300 unfavorable.= 1,550 hrs($12.20 - $12.00) LRV LRV d. $300 favorable. = $310 unfavorable
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Quick Check
Hansons labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable.
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Quick Check
Hansons labor efficiency variance (LEV) for the week was: a. $590 unfavorable. b. $590 favorable. c. $600 unfavorable. d. $600 favorable. = SR(AH - SH) LEV
LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable
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Quick Check
Actual Hours Actual Rate

1,550 hours $12.20 per hour = $18,910
Actual Hours Standard Rate

1,550 hours $12.00 per hour = $18,600
Standard Hours Standard Rate

1,500 hours $12.00 per hour = $18,000
Rate variance $310 unfavorable
Efficiency variance $600 unfavorable
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Variable MOH
Computing: -the variable MOH spending variance -the variable MOH efficiency variance
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Variable Manufacturing Overhead Variances Example

Co. A has the following direct variable MOH labor standard for its mountain parka. 1.2 standard hours per parka at $4.00 per hour Last month, employees actually worked 2,500 hours to make 2,000 parkas. Actual variable manufacturing overhead for the month was $10,500.
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Variable Manufacturing Overhead Variances Summary

Actual Hours Standard Rate 2,500 hours $4.00 per hour Standard Hours Standard Rate 2,400 hours $4.00 per hour
Actual Hours Actual Rate 2,500 hours $4.20 per hour
= $10,500
= $10,000
= $9,600
Spending variance $500 unfavorable
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= $10,500
= $10,000
= $9,600

$10,500 2,500 hours = $4.20 per hour
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= $10,500
= $10,000
= $9,600

1.2 hours per parka 2,000 parkas = 2,400 hours
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Variable Manufacturing Overhead Variances: Using Factored Equations

Variable manufacturing overhead spending variance
VMSV = AH (AR - SR) = 2,500 hours ($4.20 per hour $4.00 per hour) = 2,500 hours ($0.20 per hour) = $500 unfavorable
Variable manufacturing overhead efficiency variance

VMEV = SR (AH - SH) = $4.00 per hour (2,500 hours 2,400 hours) = $4.00 per hour (100 hours) = $400 unfavorable
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Quick Check
Hanson Inc. has the following variable manufacturing overhead standard to manufacture one unit of product A:
1.5 standard hours per unit at $3.00 per direct labor hour Last week, 1,550 hours were worked to make 1,000 units, and $5,115 was spent for variable manufacturing overhead.
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Quick Check
Hansons spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. c. $335 unfavorable. d. $300 favorable.
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Quick Check
Hansons spending variance (VOSV) for variable manufacturing overhead for the week was: a. $465 unfavorable. b. $400 favorable. VOSV = AH(AR - SR) VOSV c. $335 unfavorable. = 1,550 hrs($3.30 - $3.00) VOSV = $465 unfavorable d. $300 favorable.
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Quick Check
Hansons efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. c. $150 unfavorable. d. $150 favorable.
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Quick Check
Hansons efficiency variance (VOEV) for variable manufacturing overhead for the week was: a. $435 unfavorable. b. $435 favorable. 1,000 units 1.5 hrs per unit c. $150 unfavorable. VOEV d. $150 favorable.= SR(AH - SH)
VOEV = $3.00(1,550 hrs - 1,500 hrs) VOEV = $150 unfavorable
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Quick Check
Actual Hours Actual Rate

1,550 hours $3.30 per hour = $5,115
Actual Hours Standard Rate

1,550 hours $3.00 per hour = $4,650
Standard Hours Standard Rate

1,500 hours $3.00 per hour = $4,500
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End of Chapter 9

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Chapter 9

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Standard Direct Material

Type of Product Cost

Variance Analysis Cycle

Conduct next periods operations Prepare standard cost performance report

Setting standards for Direct Materials & Direct Labor

Setting Standard Costs

Setting Direct Material Standards

Final, delivered cost of materials, net of discounts.

Setting Direct Labor Standards

Use time and motion studies for each labor operation.

Setting Variable Overhead Standards

The rate is the variable portion of the predetermined overhead rate.

Standard Cost Card

$ 4.00 per lb. $ 14.00 per hour 3.00 per hour $

Standards vs. Budgets

Price and Quantity Standards

The buying and using activities occur at different times.

A General Model for Variance Analysis

Difference between actual price and standard price

Difference between actual quantity and standard quantity

A General Model for Variance Analysis

Materials price variance Labor rate variance VOH spending variance

Materials quantity variance Labor efficiency variance VOH efficiency variance

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

A General Model for Variance Analysis

Actual Quantity Actual Price

Actual Quantity Standard Price

Standard Quantity Standard Price

1) Computing -DM Price Variance -DM Quantity Variances

2) Explaining their significance

Material Variances Example

Material Variances Summary

Price variance $21 favorable

Quantity variance $50 unfavorable

Material Variances Summary

Price variance $21 favorable

Quantity variance $50 unfavorable

Material Variances Summary

Price variance $21 favorable

Quantity variance $50 unfavorable

Material Variances: Using the Factored Equations

Materials quantity variance

Responsibility for Material Variances