standard costs and variances - kids in prison program – · pdf file ·...

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Standard Costs and VariancesChapter 10

10-2

Standard CostsStandards are benchmarks or “norms” for

measuring performance. In managerial accounting,two types of standards are commonly used.

Quantity standards

specify how much of an

input should be used to

make a product orprovide a service.

Price standardsspecify how muchshould be paid for

each unit of theinput.

Examples: Firestone, Sears, McDonald’s, hospitals, construction, and manufacturing companies.

10-3

Standard Costs

DirectMaterial

Deviations from standards deemed significantare brought to the attention of management, apractice known as management by exception.

Type of Product Cost

Am

ount

DirectLabor

ManufacturingOverhead

Standard

10-4

Variance Analysis Cycle

10-5

Setting Standard Costs

Should we useideal standards that

require employees towork at 100 percent

peak efficiency?

Engineer Managerial Accountant

I recommend using practical standards that are currently attainable with reasonable

and efficient effort.

10-6

Setting Direct Materials Standards

Standard Priceper Unit

Summarized in a Bill of Materials.

Final, deliveredcost of materials,net of discounts.

Standard Quantityper Unit

10-7

Setting Direct Labor Standards

Use time and motion studies for

each labor operation.

Standard Hoursper Unit

Often a singlerate is used that reflectsthe mix of wages earned.

Standard Rateper Hour

10-8

Setting Variable Manufacturing Overhead Standards

The rate is the variable portion of the

predetermined overhead rate.

PriceStandard

The quantity is the activity in the

allocation base for predetermined overhead.

QuantityStandard

10-9

The Standard Cost Card

A standard cost card for one unit of product might look like this:

10-10

Using Standards in Flexible Budgets

Standard costs per unit for direct materials, direct labor, and variable manufacturing overhead can be used to compute activity and spending variances.

Spending variances become more useful by breaking them down into

quantity and price variances.

10-11

A General Model for Variance Analysis

Variance Analysis

Price Variance

Difference betweenactual price and standard price

Quantity Variance

Difference betweenactual quantity andstandard quantity

10-12

Quantity and Price Standards

Quantity and price standards are determined separately for two reasons:

❶ The purchasing manager is responsible for raw material purchase prices and the production manager is responsible for the quantity of raw material used.

❷ The buying and using activities occur at different times. Raw material purchases may be held in inventory for a period of time before being used in production.

10-13

Variance Analysis

Materials price varianceLabor rate varianceVOH rate variance

Materials quantity varianceLabor efficiency varianceVOH efficiency variance


Quantity Variance Price Variance

10-14


Quantity Variance(2) – (1)

Price Variance(3) – (2)

(1)Standard Quantity

Allowed for Actual Output,at Standard Price

(SQ × SP)

(2)Actual Quantity

of Input,at Standard Price

(AQ × SP)

(3)Actual Quantity

of Input,at Actual Price

(AQ × AP)

Spending Variance(3) – (1)

10-15

A General Model for Variance AnalysisActual quantity is the amount of direct materials, direct

labor, and variable manufacturing overhead actually used.





(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


10-16

A General Model for Variance Analysis Standard quantity is the standard quantity allowed

for the actual output of the period.





(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


10-17

A General Model for Variance Analysis Actual price is the amount actually

paid for the input used.





(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


10-18






(SQ × SP)

(2)Actual Quantity


(AQ × SP)

(3)Actual Quantity


(AQ × AP)


Standard price is the amount that shouldhave been paid for the input used.

10-19

Learning Objective 1

Compute the direct materials quantity and

price variances and explain their significance.

10-20

Glacier Peak Outfitters has the following direct materials standard 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 materials cost a

total of $1,029.

Materials Variances – An Example

10-21

200 kgs. 210 kgs. 210 kgs. × × × $5.00 per kg. $5.00 per kg. $4.90 per kg.

= $1,000 = $1,050 = $1,029

Quantity variance$50 unfavorable

Price variance$21 favorable

Materials Variances Summary

Standard Quantity Actual Quantity Actual Quantity × × × Standard Price Standard Price Actual Price

10-22



= $1,000 = $1,050 = $1,029




0.1 kg per parka × 2,000 parkas = 200 kgs

10-23



= $1,000 = $1,050 = $1,029




$1,029 ÷ 210 kgs = $4.90 per kg

10-24

Materials Variances:Using the Factored EquationsMaterials quantity variance

MQV = (AQ × SP) – (SQ × SP) = 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

Materials price varianceMPV = (AQ × AP) – (AQ × SP) = AQ(AP – SP) = 210 kgs ($4.90/kg – $5.00/kg) = 210 kgs (– $0.10/kg) = $21 F

10-25

Materials Price VarianceMaterials Quantity Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing manager’s performance.

Responsibility for Materials Variances

10-26

I am not responsible for this unfavorable materials

quantity variance. You purchased cheapmaterial, so my peoplehad to use more of it.

Your poor scheduling sometimes requires me to rush order materials at a

higher price, causing unfavorable price variances.

Responsibility for Materials Variances

Production Manager Purchasing Manager

10-27

Hanson Inc. has the following direct materials standard to manufacture one Zippy:

1.5 pounds per Zippy at $4.00 per pound

Last week, 1,700 pounds of materials were purchased and used to make 1,000 Zippies. The

materials cost a total of $6,630.

ZippyQuick Check ✓

10-28

How many pounds of materials should Hanson have used to make 1,000 Zippies?a. 1,700 pounds.b. 1,500 pounds.c. 1,200 pounds.d. 1,000 pounds.


10-29


How many pounds of materials should Hanson have used to make 1,000 Zippies?a. 1,700 pounds.b. 1,500 pounds.c. 1,200 pounds.d. 1,000 pounds. The standard quantity is:

1,000 × 1.5 pounds per Zippy.

10-30

Hanson’s materials quantity variance (MQV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.


10-31

Hanson’s materials quantity variance (MQV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.

MQV = SP(AQ - SQ) MQV = $4.00(1,700 lbs - 1,500 lbs) MQV = $800 unfavorable


10-32

Hanson’s materials price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable.


10-33

Hanson’s materials price variance (MPV)for the week was:a. $170 unfavorable.b. $170 favorable.c. $800 unfavorable.d. $800 favorable. MPV = AQ(AP - SP)

MPV = 1,700 lbs. × ($3.90 - 4.00) MPV = $170 Favorable


10-34

1,500 lbs. 1,700 lbs. 1,700 lbs. × × × $4.00 per lb. $4.00 per lb. $3.90 per lb.

= $6,000 = $ 6,800 = $6,630





10-35

1,500 lbs. 1,700 lbs. 1,700 lbs. × × × $4.00 per lb. $4.00 per lb. $3.90 per lb.

= $6,000 = $ 6,800 = $6,630





Recall that the standard quantity for 1,000 Zippiesis 1,000 × 1.5 pounds per Zippy = 1,500 pounds.

10-36


Compute the direct labor efficiency and rate

variances and explaintheir significance.

10-37

Glacier Peak Outfitters 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.

Labor Variances – An Example

10-38

Efficiency variance$1,000 unfavorable

Rate variance$1,250 unfavorable

Standard Hours Actual Hours Actual Hours × × × Standard Rate Standard Rate Actual Rate

Labor Variances Summary

2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour

= $24,000 = $25,000 = $26,250

10-39




Standard Hours Actual Hours Actual Hours × × × Standard Rate Standard Rate Actual Rate 2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour

= $24,000 = $25,000 = $26,250

1.2 hours per parka × 2,000 parkas = 2,400 hours

10-40




Standard Hours Actual Hours Actual Hours × × × Standard Rate Standard Rate Actual Rate 2,400 hours 2,500 hours 2,500 hours × × ×$10.00 per hour $10.00 per hour $10.50 per hour

= $24,000 = $25,000 = $26,250

$26,250 ÷ 2,500 hours = $10.50 per hour

10-41

Labor Variances: Using the Factored EquationsLabor efficiency variance

LEV = (AH × SR) – (SH × SR) = SR (AH – SH) = $10.00 per hour (2,500 hours – 2,400 hours) = $10.00 per hour (100 hours)

= $1,000 unfavorableLabor rate variance

LRV = (AH × AR) – (AH × SR) = AH (AR – SR) = 2,500 hours ($10.50 per hour – $10.00 per hour) = 2,500 hours ($0.50 per hour) = $1,250 unfavorable

10-42

Responsibility for Labor Variances

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employee motivation.

Quality of production supervision.

Quality of training provided to employees.

10-43

I am not responsible for the unfavorable labor

efficiency variance! You purchased cheap

material, so it took moretime to process it.

I think it took more time to process the

materials because the Maintenance

Department has poorly maintained your

equipment.

Responsibility for Labor Variances

10-44

Hanson Inc. has the following direct laborstandard to manufacture one Zippy:

1.5 standard hours per Zippy at$12.00 per direct labor hour

Last week, 1,550 direct labor hours wereworked at a total labor cost of $18,910

to make 1,000 Zippies.


10-45

Hanson’s labor efficiency variance (LEV)for the week was:a. $590 unfavorable.b. $590 favorable.c. $600 unfavorable.d. $600 favorable.


10-46

Hanson’s labor efficiency variance (LEV)for the week was:a. $590 unfavorable.b. $590 favorable.c. $600 unfavorable.d. $600 favorable.

LEV = SR(AH - SH) LEV = $12.00(1,550 hrs - 1,500 hrs) LEV = $600 unfavorable


10-47

Hanson’s labor rate variance (LRV) for the week was:a. $310 unfavorable.b. $310 favorable.c. $300 unfavorable.d. $300 favorable.


10-48

Hanson’s labor rate variance (LRV) for the week was:a. $310 unfavorable.b. $310 favorable.c. $300 unfavorable.d. $300 favorable.

LRV = AH(AR - SR) LRV = 1,550 hrs($12.20 - $12.00) LRV = $310 unfavorable


10-49

Efficiency variance$600 unfavorable

Rate variance$310 unfavorable

1,500 hours 1,550 hours 1,550 hours × × × $12.00 per hour $12.00 per hour $12.20 per hour

= $18,000 = $18,600 = $18,910



10-50


Compute the variable manufacturing overhead

efficiency and rate variances and explain

their significance.

10-51

Glacier Peak Outfitters has the following direct variable manufacturing overhead 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.

Variable Manufacturing Overhead Variances – An Example

10-52


= $9,600 = $10,000 = $10,500



Variable Manufacturing Overhead Variances Summary


10-53



= $9,600 = $10,000 = $10,500




1.2 hours per parka × 2,000 parkas = 2,400 hours

10-54



= $9,600 = $10,000 = $10,500




$10,500 ÷ 2,500 hours = $4.20 per hour

10-55

Variable Manufacturing Overhead Variances: Using Factored EquationsVariable manufacturing overhead efficiency variance

VMEV = (AH × SR) – (SH – SR) = SR (AH – SH)

= $4.00 per hour (2,500 hours – 2,400 hours) = $4.00 per hour (100 hours)

= $400 unfavorableVariable manufacturing overhead rate variance

VMRV = (AH × AR) – (AH – SR) = AH (AR – SR) = 2,500 hours ($4.20 per hour – $4.00 per hour) = 2,500 hours ($0.20 per hour) = $500 unfavorable

10-56

Hanson Inc. has the following variablemanufacturing overhead standard to

manufacture one Zippy:

1.5 standard hours per Zippy at$3.00 per direct labor hour

Last week, 1,550 hours were worked to make1,000 Zippies, and $5,115 was spent for

variable manufacturing overhead.


10-57

Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d. $150 favorable.


10-58

Hanson’s efficiency variance (VMEV) for variable manufacturing overhead for the week was:a. $435 unfavorable.b. $435 favorable.c. $150 unfavorable.d. $150 favorable.

VMEV = SR(AH - SH) VMEV = $3.00(1,550 hrs - 1,500 hrs) VMEV = $150 unfavorable

1,000 units × 1.5 hrs per unit


10-59

Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was:a. $465 unfavorable.b. $400 favorable.c. $335 unfavorable.d. $300 favorable.


10-60

Hanson’s rate variance (VMRV) for variable manufacturing overhead for the week was:a. $465 unfavorable.b. $400 favorable.c. $335 unfavorable.d. $300 favorable.

VMRV = AH(AR - SR) VMRV = 1,550 hrs($3.30 - $3.00) VMRV = $465 unfavorable


10-61




= $4,500 = $4,650 = $5,115



10-62

Materials Variances―An Important Subtlety

The quantity variance is computed only on

the quantity used.The price variance is

computed on the entire quantity purchased.

10-63

Glacier Peak Outfitters has the following direct materials standard 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 at a cost of $1,029. Glacier used 200 kgs. to make

2,000 parkas.


10-64

200 kgs. 200 kgs. × × $5.00 per kg. $5.00 per kg.

= $1,000 = $1,000

Quantity variance$0

Standard Quantity Actual Quantity × × Standard Price Standard Price


10-65

210 kgs. 210 kgs. × × $5.00 per kg. $4.90 per kg.

= $1,050 = $1,029


Actual Quantity Actual Quantity × × Standard Price Actual Price


10-66

Variance Analysis and Management by Exception

How do I knowwhich variances to

investigate?

Larger variances, in dollar amount or as a percentage of the

standard, are investigated first.

10-67

A Statistical Control Chart

1 2 3 4 5 6 7 8 9Variance Measurements

Favorable Limit

Unfavorable Limit

• • • • •• • •

•

Warning signals for investigation

Desired Value

10-68

Advantages of Standard Costs

Management byexception

Advantages

Promotes economy and efficiency

Simplifiedbookkeeping

Enhances responsibility

accounting

10-69

PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuous improvement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between laborcost and output.

Potential Problems with Standard Costs



Appendix 10A

Predetermined Overhead Rates and Overhead Analysis in a Standard Costing System

10-71


(Appendix 10A)Compute and interpret

the fixed overhead volume and budget

variances.

10-72

Volumevariance

Fixed Overhead Volume VarianceFixed

OverheadApplied

ActualFixed

Overhead

BudgetedFixed

Overhead

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead= –

10-73

FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

SH × FR DH × FR

Fixed Overhead Volume Variance

Volume variance FPOHR × (DH – SH)=

FixedOverheadApplied

ActualFixed

Overhead

BudgetedFixed

Overhead

Volumevariance

10-74

Budget variance

Fixed Overhead Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –

FixedOverheadApplied

ActualFixed

Overhead

BudgetedFixed

Overhead

10-75

Computing Fixed Overhead Variances

10-76

Computing Fixed Overhead Variances

10-77

Predetermined Overhead Rates

Predetermined overhead rate

Estimated total manufacturing overhead costEstimated total amount of the allocation base=


$360,00090,000 Machine-hours=

Predetermined overhead rate = $4.00 per machine-hour

10-78

Predetermined Overhead Rates

Variable component of thepredetermined overhead rate


Variable component of thepredetermined overhead rate = $1.00 per machine-hour

Fixed component of thepredetermined overhead rate


Fixed component of thepredetermined overhead rate = $3.00 per machine-hour

10-79

Applying Manufacturing Overhead

Overheadapplied


Standard hours allowedfor the actual output= ×

Overheadapplied

$4.00 permachine-hour 84,000 machine-hours= ×

Overheadapplied $336,000=

10-80

Computing the Volume Variance

Volumevariance

Fixedoverheadapplied to

work in process

Budgetedfixed

overhead= –

Volumevariance = $18,000 Unfavorable

Volumevariance = $270,000 – $3.00 per

machine-hour( × $84,000machine-hours)

10-81

Computing the Volume Variance

FPOHR = Fixed portion of the predetermined overhead rate DH = Denominator hours SH = Standard hours allowed for actual output

Volume variance FPOHR × (DH – SH)=

Volumevariance

= $3.00 permachine-hour (× 90,000

mach-hours – 84,000mach-hours)

Volumevariance

= 18,000 Unfavorable

10-82

Computing the Budget Variance

Budgetvariance

Budgetedfixed

overhead

Actualfixed

overhead= –

Budgetvariance = $280,000 – $270,000

Budgetvariance = $10,000 Unfavorable

10-83

A Pictorial View of the VariancesFixed Overhead

Applied toWork in Process

ActualFixed

Overhead

BudgetedFixed

Overhead 280,000270,000252,000

Total variance, $28,000 unfavorable

Budget variance,$10,000 unfavorable

Volume variance,$18,000 unfavorable

10-84

Fixed Overhead Variances –A Graphic Approach

Let’s look at a graph showing fixed overhead

variances. We will use ColaCo’s

numbers from the previous example.

10-85

Graphic Analysis of FixedOverhead Variances

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00

Fixed overhead applied at

$3.00 per standard hour

10-86

Graphic Analysis of FixedOverhead Variances

Actual$280,000

Machine-hours (000)

Budget$270,000

90

Denominatorhours

00



Budget Variance 10,000 U{

10-87

Applied$252,000

Machine-hours (000)

Budget$270,000

Graphic Analysis of Fixed Overhead Variances

908400

Standardhours



Denominatorhours

Budget Variance 10,000 U

Volume Variance 18,000 U

{{

Actual$280,000

10-88

Reconciling Overhead Variances and Underapplied or Overapplied OverheadIn a

standardcost

system:

Favorablevariances are equivalentto overapplied overhead.

The sum of the overhead variancesequals the under- or overapplied

overhead cost for the period.

10-89

Reconciling Overhead Variances and Underapplied or Overapplied Overhead

10-90

Computing the Variable Overhead Variances

Variable manufacturing overhead efficiency varianceVMEV = (AH × SR) – (SH × SR) = $88,000 – (84,000 hours × $1.00 per hour) = $4,000 unfavorable

10-91

Computing the Variable Overhead Variances

Variable manufacturing overhead rate varianceVMRV = (AH × AR) – (AH × SR) = $100,000 – (88,000 hours × $1.00 per hour) = $12,000 unfavorable

10-92

Computing the Sum of All Variances



Journal Entries to Record Variances Appendix 10B

General Ledger Entries to Record Variances

10-94


(Appendix 10B)Prepare journal entries

to record standardcosts and variances.

10-95

Glacier Peak Outfitters ― RevisitedWe will use information from the Glacier Peak Outfitters

example presented earlier in the chapter to illustrate journalentries for standard cost variances. Recall the following:

MaterialAQ × AP = $1,029AQ × SP = $1,050SQ × SP = $1,000MPV = $21 FMQV = $50 U

LaborAH × AR = $26,250AH × SR = $25,000SH × SR = $24,000LRV = $1,250 ULEV = $1,000 U

Now, let’s prepare the entries to recordthe labor and material variances.

10-96

Recording Materials Variances

10-97

Recording Labor Variances

10-98

Cost Flows in a Standard Cost System

Inventories are recorded at standard cost.Variances are recorded as follows:

• Favorable variances are credits, representing savings in production costs.

• Unfavorable variances are debits, representing excess production costs.

Standard cost variances are usually closed out to cost of goods sold.• Unfavorable variances increase cost of goods sold.• Favorable variances decrease cost of goods sold.

10-99

End of Chapter 10

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