control and evaluation of cost centers
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1. 1. Control and Evaluation of Cost Centers. Prepared by Douglas Cloud Pepperdine University. Objectives. Develop standard variable costs for a product. Calculate direct labor, variable overhead, and materials variances. - PowerPoint PPT PresentationTRANSCRIPT
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Control and Control and Evaluation of Evaluation of Cost CentersCost Centers
Prepared by Douglas Cloud
Pepperdine University
Prepared by Douglas Cloud
Pepperdine University
1111
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Develop standard variable costs for a product. Calculate direct labor, variable overhead, and
materials variances. Discuss the advantages and disadvantages of
approaches to setting standards. Describe new approaches to cost control and
management, as described by proponents of JIT and other continuous improvement approaches.
ObjectivesObjectivesObjectivesObjectives
After reading this After reading this chapter, you should chapter, you should
be able to:be able to:
After reading this After reading this chapter, you should chapter, you should
be able to:be able to:
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Cost control is important for companies following a
cost leadership strategy where total demand for the
product is not growing.
Cost control is important for companies following a
cost leadership strategy where total demand for the
product is not growing.
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A standard cost is the per-unit cost a company should incur to make a
unit of product.
A standard cost is the per-unit cost a company should incur to make a
unit of product.
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A standard cost has two components: a standard
price, or rate, and a standard quantity.
A standard cost has two components: a standard
price, or rate, and a standard quantity.
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Standard Variable CostsStandard Variable CostsStandard Variable CostsStandard Variable Costs
Cost Factor Std. Quantity Std. Price Std. CostMaterials 10.00 $0.80 $8.00Direct labor 0.50 16.00 8.00Variable overhead 0.50 6.00 3.00 Total standard variable cost $19.00
Actual results:Production 1,000 unitsMaterials purchased, 11,000 at $0.78. $8,580Materials used 10,200gallonsDirect labor, 480 hours at $16.20 $7,776Variable overhead incurred $3,100
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Labor VariancesLabor VariancesLabor VariancesLabor Variances
Actual production
(units)
Standard direct labor cost per unit
Total standard
direct labor cost
x =
1,000 x $8.00 = $8,000
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Labor VariancesLabor VariancesLabor VariancesLabor Variances
Actual input
quantity
Actual rate for input
factor
Actual cost of input factor
x =
480 hours x $16.20 = $7,776
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Labor VariancesLabor VariancesLabor VariancesLabor Variances
Actual input
quantity
Standard rate for input
factor
Budget allowance for
actual quantity of input factor
x =
480 hours x $16 = $7,680
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Labor VariancesLabor VariancesLabor VariancesLabor Variances
Standard input quantity
Standard rate for input
factor
Budget allowance for
actual quantity of
output
x =
1,000 units x ½ hour per unit = 500
hours x $16 = $8,000
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Labor VariancesLabor VariancesLabor VariancesLabor Variances
Labor rate variance $ 96 unfavorable
Labor efficiency variance 320 favorable
Total labor variance $224 favorable
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Actual Quantityat Actual Rates(Total Actual
Costs)
Flexible Budget For Actual Quantity at
Standard Rate
Flexible Budget forStandard Quantity at Standard Rate(Total Standard
Cost)
Rate variance Efficiency variance
$96 U
$320 F
$224 F
Total Variance
Labor VariancesLabor VariancesLabor VariancesLabor Variances
480 x $16.20 480 x $16.00 1,000 x 1/2 x $16.00
$7,776 $7,680 $8,000
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Variable Overhead VariancesVariable Overhead VariancesVariable Overhead VariancesVariable Overhead Variances
Actual Quantity at Actual Rate (Total Actual
Cost)
Flexible Budget for Actual
Quantity at Standard Rate
Flexible Budget for Standard Quantity at Standard Rate (Total
Standard Cost)
$220 U
Budget variance Efficiency variance
$120 F
$100 U
Total Variance
480 x $6 1,000 x 0.50 x $6$2,880 $3,000$3,100
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Variable Overhead VariancesVariable Overhead VariancesVariable Overhead VariancesVariable Overhead Variances
The variable overhead efficiency variance
reflects the efficient or inefficient use of the item
used as the cost driver.
The variable overhead efficiency variance
reflects the efficient or inefficient use of the item
used as the cost driver.
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Actual Quantity Purchased at
Standard Price
Actual Quantity
Purchased at Actual Price
Materials VariancesMaterials VariancesMaterials VariancesMaterials Variances
$8,580 $8,800
11,000 x $0.78 11,000 x $0.80
$220 FMaterial Price Variance
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Materials VariancesMaterials VariancesMaterials VariancesMaterials Variances
Material price
variance
Actual quantity
purchased
Standard price
Actual price
–= x
$220 F = 11,000 x ($0.80 – $0.78)
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Materials VariancesMaterials VariancesMaterials VariancesMaterials Variances
Flexible Budget for Standard Quantity at Standard Price (Total
Standard Cost)
Flexible Budget for Actual
Quantity Used at Standard Price
$8,160 $8,000
10,200 x $0.80 1,000 x 10 x $0.80
$160 UMaterial Use Variance
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Materials VariancesMaterials VariancesMaterials VariancesMaterials Variances
Material use
variance
Standard price
Standard quantity for
actual output
Actual quantity
–= x
$160 U = $0.80 x (10,000 – 10,200)
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Material use variance—is calculated the same as the labor and overhead efficiency variances
Material price variance—differs from its counterparts in labor and variable overhead because materials,unlike labor, can be stored. Purchases made in one period are not necessarily used in that period, but the economic effect of paying more or less than standard prices for materials occurs at the time of purchase. So the material price variance is based on the quantity of materials purchased, not the quantity used.
Materials VariancesMaterials VariancesMaterials VariancesMaterials Variances
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• There are two principle variable overhead cost pools.
• One is driven by machine time, while the other is driven by the number of machine setups.
• The two rates are $6.00 per machine hour and $140 per setup.
ContinuedContinued
Standard Costs and Activity-Based Costing Example
Standard Costs and Activity-Based Costing Example
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• The standard machine hours and number of setups for 1 batch (1,000 units) is 1,500 hours and 20 setups, respectively.
• Actual machine hours and number of setups for 10 batches (10,000 units) are 14,000 hours and 210 setups, respectively.
• The actual overhead costs driven by machine hours and number of setups are $85,000 and $27,500, respectively.
Standard Costs and Activity-Based Costing Example
Standard Costs and Activity-Based Costing Example
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Actual Cost
Budget for Actual
Use
Standard Cost
Standard Costs and Activity-Based Costing Example
Standard Costs and Activity-Based Costing Example
$1,000 U
Budget variance Efficiency variance
$6,000 F
$5,000 F
Total Variance
14,000 x $6.00 10 x 1,500 x $6.00$84,000 $90,000$85,000
Machine-driven variable overhead
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Actual Cost
Budget for Actual
Use
Standard Cost
Standard Costs and Activity-Based Costing Example
Standard Costs and Activity-Based Costing Example
$1,900 F
Budget variance Efficiency variance
$1,400 U
$500 F
Total Variance
210 x $140 10 x 20 x $140$29,400 $28,000$27,500
Setup-driven variable overhead
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Variances and Performance Evaluation
Variances and Performance Evaluation
• Variances signal nonstandard performance only if they are based on up-to-date standards that reflect current production methods and current prices of input factors.
• Many variances are interdependent.
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Setting Standards—Behavioral Problems
Setting Standards—Behavioral Problems
Engineering methods
Managerial estimates
Benchmarking and best practices
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Setting Standards—Behavioral Problems
Setting Standards—Behavioral Problems
Engineering Methods
Some companies develop standard quantities for materials and labor by
carefully examining production methods and determining how much of an input
factor is necessary to obtain a finished unit.
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Setting Standards—Behavioral Problems
Setting Standards—Behavioral Problems
Managerial Estimates
Some companies rely on the judgment of managers closest to the task to determine quantities of input needed to produce a
unit of product. Managers who participate in setting standards are more
likely to commit to meeting them.
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Benchmarking is a relatively recent development that companies use to determine whether their operations and costs compare
favorably to those of world-class companies.
Setting Standards—Behavioral Problems
Setting Standards—Behavioral Problems
Benchmarking
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What Standard?What Standard?
An ideal standard can be attained only under perfect conditions.
Setting a currently attainable standard recognizes expectations about efficiency under normal working conditions.
An historical standard is based on experience.
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Kaizen Costing and Target Costing
Kaizen Costing and Target Costing
Kaizen costing stresses continuous improvement in the production process. Under kaizen, performance standards are
continually raised (standard costs lowered), so the objective is to meet targeted reductions,
not standard costs.
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Kaizen Costing and Target Costing
Kaizen Costing and Target Costing
Value engineering refers to design and re-design that focuses on customer value. Value
engineering is redesigning products so that they will cost less. Value engineering is an optimizing
technique where people seek exactly what features the product needs, how to make it, what
materials to use, and so on.
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Kaizen Costing and Target Costing
Kaizen Costing and Target Costing
Target costing is price-driven; market prices
determine cost instead of vice versa. Companies reduce cost through systemic analyses of
the features and functions deemed most important to customers. Much of target costing takes place during
product design.
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The EndThe End
Chapter 11Chapter 11
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