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Standard Costing and Variance Analysis

Cost Accounting: Foundations and Evolutions, 8e


Kinney Raiborn

Learning Objectives

How are material, labor, and overhead standards set? How are material, labor, and overhead variances calculated and recorded? Why are standard cost systems used? How have the setting and use of standards changed over time? How does the use of a single conversion element rather than the traditional labor and overhead elements! affect standard costing? (Appendix) How are variances affected by multi"le material and labor categories?

#tandard $ost #ystems


%anufacturing #ervice &ot'for'(rofit Record standard and actual costs in the accounting records

#tandards

#tandard costs are budgeted costs to


%anufacture a single unit of "roduct or (erform a single service %aterial and labor ty"es, *uantities, and "rices Overhead ty"es and behavior

)o develo" standards, identify


%anufacturing Objective
%inimi+e unit cost while achieving certain *uality s"ecifications,

-n"ut Resources

Out"ut .uality

%aterial #tandards

%aterials used

/rom

)y"es .uantity .uality (rice

(roduct s"ecifications, observation, in*uiry 0ill of materials

0alance cost, *uality, and "rojected sales "rice


Standard Material = Cost Unit Purchase Price * quantity

Labor #tandards

Labor used

/rom

)y"es

(roduction, setu", cleanu", and rewor1

.uantity $ost

-nclude wages, "ayroll ta2es, and fringe benefits

-ndustrial engineering studies including methods'time measurement %)%!, time and motion studies, historical data O"erations flow document

Standard Labor = Cost

Hours * Wage Rate

Overhead #tandards
3ariable and fi2ed manufacturing overhead 4stimated level of activity 4stimated costs (redetermined factory overhead a""lication rates

#tandard $ost $ard


/or one unit of out"ut a bi1e! #tandard 5irect %aterial $om"onents #tandard 5irect Labor $om"onents %anufacturing Overhead 3ariable Overhead /i2ed Overhead

3ariance
3ariance is the difference between an actual cost and a standard cost,

)otal 3ariance
)otal actual cost incurred minus total standard cost a""lied to out"ut "roduced

6ctual "rice of actual "roduction in"ut

#tandard cost of actual "roduction out"ut

)otal 3ariance*
*

/avorable or unfavorable

)otal 3ariance
AP
-n"uts

A! )otal 3ariance

SP

S!
Out"uts

AP = actual cost7"rice "er unit of materials or hours of labor A! = actual *uantity of materials or hours of labor SP = standard cost7"rice "er unit of materials or hours of labor S! = standard *uantity of materials or hours of labor

(rice 3ariance
AP A! SP A! SP S!

(rice7Rate

3ariance )otal 3ariance


What was "aid
8

"AP # SP$

A!*

What should have been "aid

/avorable or unfavorable

9sage 3ariance
AP A! SP A! SP 9sage 3ariance S!

What was used


8

)otal 3ariance "A! # S!$ SP


*

/avorable or unfavorable

What should have been used for the level of out"ut

%aterial (rice 3ariance %(3!


AP A! SP A! SP S!

%(3 )otal 3ariance


What was "aid
8

"AP # SP$

A!*

What should have been "aid

/avorable or unfavorable

%(3 $alculations

$alculate %(3 at (oint of "urchase or When materials used

%aterial .uantity 3ariance %.3!


AP A! SP A! SP S!

%.3
What was used
8

)otal 3ariance "A! # S!$ SP


*

/avorable or unfavorable

What should have been used for level of out"ut

Labor Rate 3ariance LR3!


AP A! SP A! SP S!

LR3 )otal 3ariance


What was "aid
8

"AP # SP$

A!*

What should have been "aid

/avorable or unfavorable

Labor 4fficiency 3ariance L43!


AP A! SP A! L43
What was used
8

SP

S!

)otal 3ariance "A! # S!$ SP


*

/avorable or unfavorable

What should have been used for level of out"ut

Overhead 3ariances
3ariable Overhead 6ctual variable overhead is total of various ledger accounts #( : (redetermined variable overhead rate /i2ed Overhead 6ctual fi2ed overhead is total of various ledger accounts #( : (redetermined fi2ed overhead rate

3ariable Overhead 3ariances


6ctual 3OH Actual 0udgeted 3OH SP A! 6""lied 3OH SP S!

/or actual hours used

3OH #"ending 3ariance

3OH 4fficiency 3ariance


What should have been used for level of out"ut

)otal 3OH 3ariance

3OH #"ending 3ariance

$aused by "rice differences

%anagers have little control over "rices %anagers should be held accountable

$aused by shrin1age or waste

/i2ed Overhead 3ariances


6ctual /OH 0udgeted /OH 6""lied /OH #( 2 #.
/OH #"ending 3ariance /OH 3olume 3ariance
What should have been used for level of out"ut

$onstant 6mount

)otal /OH 3ariance

/OH #"ending and 3olume 3ariance

/OH #"ending 3ariance

/OH 3olume 3ariance

$alculate variance for each com"onent $aused by "rice differences %ay reflect mismanagement of resources

%easures ca"acity utili+ation $aused by "roducing at a level that differs from the ca"acity level used to com"ute the "redetermined overhead rate 6lso called the noncontrollable variance

6lternative Overhead 3ariance 6""roaches


One variance )wo variance )hree variance /our variance

One 3ariance 6""roach


6ctual OH #tandard $ost of OH #( 2 #.

)otal OH 3ariance
6""lied Overhead

)wo 3ariance 6""roach


6ctual 0udgeted OH #tandard OH based on #. $ost of OH #( 2 #.
0udget 3ariance 3olume 3ariance
6""lied Overhead

)otal OH 3ariance

)hree 3ariance 6""roach


6ctual OH 0udgeted OH
based on based on 6ctual -n"uts 6ctual Out"ut

#tandard OH #( 2 #.

OH #"ending 3ariance

OH 4fficiency 3ariance

3olume 3ariance
6""lied Overhead

)otal OH 3ariance

#tandard $ost ;ournal 4ntries


3ariances recorded in accounting system /avorable variances


$redits Re"resent savings in "roduction costs 5ebits Re"resent e2cess "roduction costs

9nfavorable variances

-nventories are recorded at standard cost during the "eriod

(urchase of %aterials (oint of (urchase %ethod!


6t #tandard $ost

%aterials #( 2 6. "urchased

%aterials (rice 3ariance 9 /

6ccts (ay 6( 2 6. "urchased

%ebit&Un'a(orable Credit&)a(orable

9se of %aterials
6t #tandard $ost

W-( #( 2 #. allowed

%aterials .uantity 3ariance 9 /

%aterials #( 2 6. used

%ebit&Un'a(orable Credit&)a(orable

Record Labor
6t #tandard $ost

LR3 9 /

L43

W-( #( 2 #. allowed

Wages (ay 6( 2 6.

%ebit&Un'a(orable Credit&)a(orable

6""ly Overhead

W-( #( 2 #. 6llowed

3OH #( 2 #. 6llowed

/OH #( 2 #. 6llowed

<ear'4nd )reatment for 3OH


3OH 4fficiency 3ariance 3OH #"ending 3ariance 3OH 6ctual 6""lied
---------------

%ebit&Un'a(orable Credit&)a(orable

*nter a debit or credit to bring balance to +ero

<ear'4nd )reatment for /OH


/OH #"ending 3ariance 3olume 3ariance /OH 6ctual 6""lied
-------------

%ebit&Un'a(orable Credit&)a(orable

*nter a debit or credit to bring balance to +ero

<ear'4nd )reatment of 3ariances


-mmaterial>6djust $ost of =oods #old %aterial>(rorate variances to?

%aterial (rice 3ariances


6ll other variances


Raw %aterials W-( /inished =oods $ost of =oods #old

W-( /inished =oods $ost of =oods #old

Why 9se #tandard $ost #ystems


%otivation (lanning $ontrolling&variance analysis 5ecision ma1ing (erformance evaluation

#etting #tandards and )rends

#etting #tandards

6""ro"riateness 6ttainability

42"ected standards (ractical standards -deal standards

)rends in #tandards -deal #tandards and )heoretical $a"acity 6djusting standards (rice variance on "urchase versus usage 5ecline in direct labor content

$onversion $osts

$ombine direct labor and manufacturing overhead 3ariances


#"ending variance for overhead 4fficiency variances for machinery and "roduction costs 3olume variances for "roduction

%aterial (rice, %i2, and <ield 3ariances


AM A! AP AM A! SP SM A! SP SM S! SP

Material Price Variance AM&Actual Mi SM&Standard Mi

Material Mi Variance

Material ,ield Variance

What should have been used for level of out"ut?

Labor Rate, %i2, and <ield 3ariances


AM AH AR AM AH SR SM AH SR SM SH SR

Labor Rate Variance M&Mi H&Hours R&Rate

Labor Mi Variance

Labor ,ield Variance

What should have been used for level of out"ut?

.uestions

How are standards set for material, labor, and overhead? How is variance analysis used for control and "erformance evaluation? Why are labor and overhead elements sometimes combined into a single conversion element?

(otential 4thical -ssues


#etting high standards to create favorable variances -gnoring effects of one "roduction area on another #etting overhead rates too low based on high "roduction levels to distort inventory cost and o"erating income (roducing inventory only to create a favorable volume variance &ot u"dating standards so that favorable variances are created 9sing low *uality materials or labor to create favorable variances and low *uality "roducts