Standard Costs and Variance Analysis

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Standard Costs and Variance Analysis

© All Rights Reserved

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Anda di halaman 1dari 31

by James Jiambalvo

Chapter 9:

Standard Costs and Variance

Analysis

Scott Peterson

Northern State University

Chapter 9: Standard Costs

and Variance Analysis

Chapter Themes: Learning Objectives:

Its all about standards 1. Explain how standard costs are

developed.

and benchmarks.

2. Calculate and interpret variances

It is important to measure for direct material.

actual values against 3. Calculate and interpret variances

goals and standards. for direct labor.

Responsibility should be 4. Calculate and interpret variances

for manufacturing overhead.

commensurate with

5. Discuss how the management by

controllability. exception approach is applied to

investigation of standard cost

variances.

Standard Costs

The term standard cost refers Learning Objectives:

to the cost that management 1. Explain how standard costs are

believes should be incurred developed.

to produce a good or service 2. Calculate and interpret variances

for direct material.

under anticipated conditions.

3. Calculate and interpret variances

The primary benefit of a for direct labor.

standard cost system is that 4. Calculate and interpret variances

it allows for comparison of for manufacturing overhead.

standard versus actual costs. 5. Discuss how the management by

Differences are referred to as exception approach is applied to

investigation of standard cost

standard cost variances and

variances.

should be investigated if

significant.

Standard Costs and Budgets

At the outset, it is important Related Learning Objectives:

to understand the subtle 1. Explain how standard costs are

differences in definitions of developed.

standard cost and budgeted 2. Calculate and interpret variances

for direct material.

cost.

3. Calculate and interpret variances

for direct labor.

Standard cost: the standard 4. Calculate and interpret variances

cost of a single unit. for manufacturing overhead.

5. Discuss how the management by

exception approach is applied to

Budgeted cost: the cost, at investigation of standard cost

variances.

standard, of the total number

of budgeted units.

Development of Standard

Costs

Standard costs are Related Learning Objectives:

developed in a variety of 1. Explain how standard costs are

ways. They are developed.

1. specified in engineering 2. Calculate and interpret variances

plans. for direct material.

3. Calculate and interpret variances

for direct labor.

4. Calculate and interpret variances

for manufacturing overhead.

5. Discuss how the management by

exception approach is applied to

investigation of standard cost

variances.

Development of Standard

Costs

Standard costs are Related Learning Objectives:

developed in a variety of 1. Explain how standard costs are

ways. They are developed.

1. specified by formulas or 2. Calculate and interpret variances

recipes. for direct material.

2. developed from price lists 3. Calculate and interpret variances

for direct labor.

provided by suppliers.

4. Calculate and interpret variances

for manufacturing overhead.

5. Discuss how the management by

exception approach is applied to

investigation of standard cost

variances.

Development of Standard

Costs

Standard costs are Related Learning Objectives:

developed in a variety of 1. Explain how standard costs are

ways. They are developed.

1. specified by formulas or 2. Calculate and interpret variances

recipes. for direct material.

2. developed from price lists 3. Calculate and interpret variances

for direct labor.

provided by suppliers.

4. Calculate and interpret variances

3. determined time and motion for manufacturing overhead.

studies conducted by

5. Discuss how the management by

industrial engineers. exception approach is applied to

investigation of standard cost

variances.

Development of Standard

Costs

Standard costs are Related Learning Objectives:

developed in a variety of 1. Explain how standard costs are

ways. They are developed.

1. specified by formulas or 2. Calculate and interpret variances

recipes. for direct material.

2. developed from price lists 3. Calculate and interpret variances

for direct labor.

provided by suppliers.

4. Calculate and interpret variances

3. determined time and motion for manufacturing overhead.

studies conducted by

5. Discuss how the management by

industrial engineers. exception approach is applied to

4. developed from analyses of investigation of standard cost

past data. variances.

Ideal Versus Attainable

Standards

In developing standard costs, Related Learning Objectives:

there are two schools of thought. 1. Explain how standard costs are

Ideal standards: developed developed.

under the assumption that no 2. Calculate and interpret variances

obstacles to the production for direct material.

process will be encountered. 3. Calculate and interpret variances

They are sometimes referred to for direct labor.

as perfection standards. 4. Calculate and interpret variances

for manufacturing overhead.

Attainable Standards: developed

5. Discuss how the management by

under the assumption that there

exception approach is applied to

will be occasional problems in investigation of standard cost

the production process such as variances.

equipment failure, labor

turnover, and materials defects.

A General Approach to

Variance Analysis

An analysis of the difference Related Learning Objectives:

between a standard cost and and 1. Explain how standard costs are

actual cost is called variance developed.

analysis. The process

decomposes the difference in 2. Calculate and interpret

two components. variances for direct material.

3. Calculate and interpret

For direct material: materials

variances for direct labor.

price and materials quantity

variance. 4. Calculate and interpret

variances for manufacturing

For direct labor: labor rate (price)

overhead.

and labor efficiency (quantity)

variance. 5. Discuss how the management by

exception approach is applied to

For overhead: overhead volume investigation of standard cost

variance and controllable variances.

overhead variance.

Material Price Variance

The material price variance is Related Learning Objectives:

expressed as (AP SP)AQp 1. Explain how standard costs are

where: developed.

(AP) = actual price per unit of 2. Calculate and interpret

material. variances for direct material.

(SP) = standard price per unit of 3. Calculate and interpret variances

for direct labor.

direct material.

4. Calculate and interpret variances

(AQp) = actual quantity of for manufacturing overhead.

material purchased.

5. Discuss how the management by

If actual price > standard price, exception approach is applied to

then the variance is unfavorable. investigation of standard cost

If actual price < standard price, variances.

then the variance is favorable.

Material Quantity Variance

The material quantity variance is Related Learning Objectives:

expressed as (AQu SQ)SP 1. Explain how standard costs are

where: developed.

(AQu) = actual quantity of 2. Calculate and interpret

material used. variances for direct material.

(SQ) = standard quantity of 3. Calculate and interpret variances

material allowed. for direct labor.

(SP) = standard price of 4. Calculate and interpret variances

material. for manufacturing overhead.

If actual quantity > standard 5. Discuss how the management by

quantity, then the variance is exception approach is applied to

unfavorable. investigation of standard cost

If actual quantity < standard variances.

quantity, then the variance is

favorable.

Labor Rate Variance

The labor rate (price) variance is Related Learning Objectives:

expressed as (AR SR)AH 1. Explain how standard costs are

where: developed.

(AR) = actual wage rate (price). 2. Calculate and interpret variances

(SR) = standard wage rate for direct material.

(price). 3. Calculate and interpret

variances for direct labor.

(AH) = actual number(quantity) of

4. Calculate and interpret variances

labor hours. for manufacturing overhead.

If actual rate > standard rate, 5. Discuss how the management by

then the variance is unfavorable. exception approach is applied to

If actual rate < standard rate, investigation of standard cost

then the variance is favorable. variances.

Labor Efficiency Variance

The labor efficiency (quantity) Related Learning Objectives:

variance is expressed as (AH 1. Explain how standard costs are

SH)SR where: developed.

(AH) = actual number of hours 2. Calculate and interpret variances

worked. for direct material.

(SH) = standard number of 3. Calculate and interpret

variances for direct labor.

hours worked.

4. Calculate and interpret variances

(SR) = standard labor wage rate. for manufacturing overhead.

If actual hours > standard hours, 5. Discuss how the management by

then the variance is unfavorable. exception approach is applied to

If actual hours < standard hours, investigation of standard cost

then the variance is favorable. variances.

Controllable Overhead

Variance

The controllable overhead Related Learning Objectives:

variance is expressed as (actual 1. Explain how standard costs are

overhead - flexible budget level developed.

of overhead) for actual level of 2. Calculate and interpret variances

production. It is referred to as for direct material.

controllable because managers 3. Calculate and interpret variances

are expected to control costs so for direct labor.

they are not substantially 4. Calculate and interpret

different from budget. variances for manufacturing

If actual > budget, then the overhead.

variance is unfavorable. 5. Discuss how the management by

exception approach is applied to

If actual < budget, then the investigation of standard cost

variance is favorable. variances.

Overhead Volume Variance

The overhead volume variance is Related Learning Objectives:

expressed as (flexible budget 1. Explain how standard costs are

level of overhead for actual level developed.

of production - overhead applied 2. Calculate and interpret variances

to production using standard for direct material.

overhead rate). This variance is 3. Calculate and interpret variances

solely the product of more or for direct labor.

less units being produced than 4. Calculate and interpret

planned in the static budget. Its variances for manufacturing

usefulness is limited. overhead.

5. Discuss how the management by

exception approach is applied to

investigation of standard cost

variances.

Investigation of Standard Cost

Variances

It is important to note that Related Learning Objectives:

standard cost variances are not 1. Explain how standard costs are

a definitive sign of good or bad developed.

performance. These variances 2. Calculate and interpret

are merely indicators of potential variances for direct material.

problems which must be 3. Calculate and interpret

investigated. And there are many variances for direct labor.

plausible explanations for them. 4. Calculate and interpret

variances for manufacturing

overhead.

5. Discuss how the management by

exception approach is applied to

investigation of standard cost

variances.

Management by Exception

Because investigation of Related Learning Objectives:

standard cost variances is itself 1. Explain how standard costs are

a costly activity, management developed.

must decide which variances to 2. Calculate and interpret variances

investigate. Most managers for direct material.

practice management by 3. Calculate and interpret variances

exception. What is for direct labor.

exceptional? Usually an 4. Calculate and interpret variances

absolute dollar amount or a for manufacturing overhead.

percentage dollar amount. 5. Discuss how the management by

exception approach is applied to

investigation of standard cost

variances.

Favorable Variances May Be

Unfavorable

The fact that a variance is Related Learning Objectives:

favorable does not mean that it 1. Explain how standard costs are

should not be investigated. Raw developed.

materials are good examples of 2. Calculate and interpret variances

this phenomenon, especially for direct material.

considering the competitive 3. Calculate and interpret variances

pricing environment for most for direct labor.

commodities. Suppose inferior, 4. Calculate and interpret variances

low-priced materials are ordered. for manufacturing overhead.

One the one hand, a favorable 5. Discuss how the management by

price variance will arise. On the exception approach is applied to

other hand, most likely there will investigation of standard cost

be substantially more scrap and variances.

rework, and thus a higher

quantity variance.

Responsibility Accounting and

Variances

As noted previously, Related Learning Objectives:

managers should be held 1. Explain how standard costs are

responsible only for costs developed.

they can control. This is true 2. Calculate and interpret

variances for direct material.

in the area of variance

3. Calculate and interpret

analysis. For example, a variances for direct labor.

purchasing agent may be 4. Calculate and interpret

held responsible for direct variances for manufacturing

material price variances, but overhead.

certainly not direct material 5. Discuss how the management

by exception approach is

quantity (usage) variances.

applied to investigation of

standard cost variances.

Appendix A: Recording

Standard Costs in Accounts

In a standard costing system, Related Learning Objectives:

the costs added to the Raw 1. Record standard costs in the

Materials Inventory, Work in account of a manufacturing

firm.

Process Inventory, Finished

Goods Inventory, and Cost of

Goods Sold accounts are all

recorded at standard rather

than actual cost. Variances

are also calculated and

recorded for managements

use in performance

evaluation.

Recording Material Costs

Purchase of raw materials inventory: Related

Account dr. cr. Learning

Raw Material Inventory (std.) x Objectives:

Material Price Variance x Record standard

costs in the

Accounts Payable (actual) x account of a

(This is an unfavorable price variance) manufacturing firm.

Usage of raw materials inventory:

Account dr. cr.

Work in Process Inventory x

Material Quantity Variance x

Raw Material Inventory x

(This is an unfavorable quantity variance)

Recording Labor Cost

Account dr. cr. Related

Work in Process Inventory (std.) x Learning

Labor Rate Variance x Objectives:

Labor Efficiency Variance x Record standard

costs in the

Salaries Payable (actual) x account of a

(Note: both the labor rate variance and manufacturing firm.

efficiency variance are unfavorable)

Recording Manufacturing

Overhead

Recording manufacturing overhead in a Related

standard costing system is a three-step Learning

process: Objectives:

Record standard

1. Actual overhead is recorded in the costs in the

manufacturing overhead account. account of a

manufacturing firm.

2. Overhead is applied to Work in Process

Inventory at the standard cost.

3. The difference between actual overhead

and overhead applied at standard is

closed and overhead variances are

identified.

More

Recording Manufacturing

Overhead (Step 1)

To record actual overhead cost: Related

Learning

Account dr. cr. Objectives:

Manufacturing Overhead x Record standard

costs in the

*Various Accounts x account of a

manufacturing firm.

payable, utilities payable and accumulated

depreciation.

Recording Manufacturing

Overhead (Step 2)

To apply overhead cost to work in process Related

inventory at cost: Learning

Objectives:

Account dr. cr. Record standard

Work in Process Inventory x costs in the

account of a

Manufacturing Overhead x manufacturing firm.

Recording Manufacturing

Overhead (Step 3)

To close out manufacturing overhead cost to Related

work in process inventory at cost: Learning

Objectives:

Account dr. cr. Record standard

Manufacturing Overhead x costs in the

account of a

Overhead Volume manufacturing firm.

Variance x

Controllable Overhead

Variance x

Recording Finished Goods

To record completed units sent to finished Related

goods: Learning

Objectives:

Account dr. cr. Record standard

Finished Goods Inventory x costs in the

account of a

Work in Process manufacturing firm.

Inventory x

Recording Cost of Goods Sold

To apply overhead cost to work in process Related

inventory at cost: Learning

Objectives:

Account dr. cr. Record standard

Cost of Goods Sold x costs in the

account of a

Finished Goods manufacturing firm.

Inventory x

Closing Variance Accounts

At the end of the accounting period, the Related

temporary variance accounts must be closed. Learning

As a practical matter this is usually Objectives:

accomplished by debiting or crediting the

Record standard

variances to cost of goods sold. costs in the

Account dr. cr. account of a

Cost of Goods Sold x manufacturing firm.

Controllable Overhead Variance x

Material Price Variance x

Material Quantity Variance x

Labor Rate Variance x

Labor Efficiency Variance x

Copyright

2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or

translation of this work beyond that permitted in Section 117 of the 1976

United States Copyright Act without the express written permission of the

copyright owner is unlawful. Request for further information should be

addressed to the Permissions Department, John Wiley & Sons, Inc. The

purchaser may make back-up copies for his/her own use only and not for

distribution or resale. The Publisher assumes no responsibility for errors,

omissions, or damages, caused by the use of these programs or from the

use of the information contained herein.

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