MANAGEMENT ACCOUNTING

AGUS SISWANDI 01153056

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Chapter Nine

Standard Costing: A Managerial Control Tool

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Learning Objectives
Explain how unit standards are set and

why standard cost systems are adopted.

Explain the purpose of a standard cost

sheet.
Describe the basic concepts underlying

variance analysis and explain when variances should be investigated.

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Learning Objectives (continued)

Compute the materials and labor

variances and explain how they are used for control.

Compute the variable and fixed

overhead variances and explain their meanings.

Prepare journal entries for materials

and labor variances and describe the accounting for overhead variances. (Appendix)

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Unit Standard Cost

To determine the unit standard cost for a particular input, two decisions must be made:
1. How much of the input should be used per unit of

output (Quantity decision)?

2. How much should be paid for the quantity of the input to be used (Pricing decision)?

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Types of Standards
Ideal Standards demand maximum efficiency and can be achieved only if everything operates perfectly. Currently attainable standards can be achieved under efficient operating conditions.

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Sources for Quantitative Standards

1. Historical experience 2. Engineering studies 3. Input from operating personnel

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Factors for Price Standards - Materials

1. Market forces
2. Discounts 3. Freight 4. Quality

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Factors for Price Standards - Labor

1. Market forces
2. Trade unions 3. Payroll taxes 4. Qualifications

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Purposes of Standards

To improve planning and control To facilitate product costing

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Cost Assignment Approaches

Manufacturing Costs Direct Materials Actual costing system Actual Direct Labor Actual

Overhead Actual

Normal costing system

Standard costing system

Actual
Standard

Actual
Standard

Budgeted
Standard

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A Standard Cost Sheet

Description
Direct materials Direct labor Variable overhead Fixed Overhead1

Standard Price
$1.50/lb. $6.00/hr. $10.00/hr. $8.00/hr.

Standard Usage
10 lbs. 2 hours 2 hours 2 hours

Standard Cost/Unit
$15.00 12.00 20.00 16.00 $63.00

Other Operating Data for Period: Units produced 20,000 units 210,000 pounds purchased @ $1.55 per pound; 205,000 lbs. used Direct labor costs $39,000 hours @ $6.10 per hour Variable overhead $410,000 1Fixed overhead $300,000; Rate = ($310,000/38,750 hrs)

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Variance Analysis: General Description

Actual Quantity of Input at Actual Price AQ x AP

Actual Quantity of Input at Standard Price AQ x SP

Standard Quantity of Input at Standard Price SQ x SP

Price Variance AQ x (AP - SP)

Usage Variance SP x (AQ - SQ)

Budget Variance (AQ x AP) - (SQ x SP)

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Variance Investigation

Variances are investigated if two conditions are met:

1. The variance is material 2. The benefits of investigating and taking corrective action are greater than its costs

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Control Limits: Standard + Allowable Deviation

Investigating occurs for values outside the allowable range.
Example: Assume the allowable deviation may be the lesser of $8,000 or 10% of the standard. Suppose the standard is $50,000 and the actual deviation from standard is $6,000. Will the variance be investigated. Answer: Yes. Ten percent of standard is $5,000. Since $6,000 is larger than the allowable deviation, an investigation will take place.

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Material Variances
Formula Approach: MPV = (AP - SP)AQ = ($1.55-$1.50)210,000 = $10,500 U Diagram Approach: MUV = (AQ - SQ)SP = (205,000 - 200,000)$1.50 = $7,500U

SQ = 20,000 units x 10 lbs per unit

AQ x AP
210,000 x $1.55

AQ x SP

AQ x SP

SQ x SP
200,000 x $1.50

210,000 x $1.50 205,000 x $1.50

MPV = $10,500U
Responsibility: Purchasing

MUV = $7,500U
Responsibility: Manufacturing

Flexible Budget Variance = $18,000U

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Labor Variances
Formula Approach: LRV = (AR - SR)AH = ($6.10 - $6.00)39,000 = $3,900 U Diagram Approach: LEV = (AH - SH)SR = (39,000 - 40,000)$6.00 = $6,000 F

SQ = 20,000 units x 2 hrs. per unit

AH x AR 39,000 x $6.10
LRV = $3,900 U
Responsibility: Human Resources

AH x SR 39,000 x $6.00
LEV = $6,000 U
Responsibility: Manufacturing

SH x SR 40,000 x $6.00

Flexible Budget Variance = $2,100 F

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Variable Overhead Variances

Formula Approach: OSV = (AVOR - SVOR)AH = $410,000 - ($10 X 39,000 hrs) = $20,000 U Diagram Approach: AH x AVOR $410,000 OEV = (AH - SH)SVOR = (39,000 - 40,000)$10.00 = $10,000 F

SQ = 20,000 units x 2 hrs. per unit

AH x SVOR
39,000 x $10.00

SH x SVOR
40,000 x $10.00 OEV = $10,000 F
Responsibility: Manufacturing

OSV = $20,000 U
Responsibility: Manufacturing

Flexible Budget Variance = $10,000 U

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Fixed Overhead Variances

Actual Overhead $300,000 Budgeted Overhead $310,000 Applied Overhead SOR x SH($8 x40,000)

OSV = $10,000F
Responsibility: Manufacturing

OVV = 10,000F
Responsibility: Difficult to Assess

Alternative Approach for Computing Overhead Volume Variance Planned level Applied level (SOR) Over Overhead Volume Variance 38,750 40,000 1,250 x $8 $10,000 ====== hrs. hrs. hrs. F
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Accounting for Variances

Journal Entry for Purchase of Direct Materials Materials (AQ x SP) MPV (AP - SP)AQ Accounts Payable (AQ x AP) 315,000 10,500 325,500

Rule: Unfavorable variances are debited and favorable variances are credited.

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Accounting for Variances (continued)

Recording the Issuance of Materials to Production Work in Process (SQ x SP) MUV [(AQ - SQ)SP] Materials (AQ x SP) 300,000 7,500 307,500

AQ = Actual quantity used in production

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Accounting for Variances (continued)

Recording the Direct Labor Costs Work in Process (SH x SR) LEV [(AH - SH) SR] Accrued Payroll (AH x AR) LRV [(AR - SR) AH] 240,000 3,900 237,900 6,000

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Accounting for Variances (continued)

Recording Variable Overhead Work in Process (SQ x SP) Manufacturing Applied (SQ x SP) Manufacturing Overhead (Actual Cost) Various Accounts 400,000 400,000 410,000 410,000

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Accounting for Variances (continued)

Recording Fixed Overhead Work in Process (SQ x SP) Manufacturing Overhead Applied Manufacturing Overhead (Actual Cost) Various Accounts 320,000 320,000 300,000 300,000

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Accounting for Variances (continued)

Recording Overhead Variances and Closing the Overhead Accounts

Manufacturing Overhead Applied (Variable) Manufacturing Overhead Applied (Fixed) OSV (Variable) Manufacturing Overhead (Variable) Manufacturing Overhead (Fixed) OEV OSV (Fixed) PVV

400,000 320,000 20,000

410,000 300,000 10,000 10,000 10,000

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Accounting for Variances (continued)

Disposition of Variances OEV OSV (Fixed) PVV OSV (Fixed) Cost of Goods Sold 20,000 10,000 10,000 10,000 30,000

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End of Chapter 9

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