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The Basis for Business Decisions. Financial & Managerial Accounting. FOURTEENTH EDITION. Williams Haka Bettner Carcello. Chapter 24. STANDARD COST SYSTEMS. Learning Objective. To explain standard costs and how they assist managers in controlling costs. LO1.

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The basis for business decisions

The Basis for Business Decisions

Financial & Managerial Accounting

FOURTEENTH EDITION

Williams Haka Bettner Carcello


Financial managerial accounting

Chapter24

STANDARD COST SYSTEMS


Learning objective

Learning Objective

To explain standard costsand how they assistmanagers in controllingcosts.

LO1


Standard cost systems

Standard Costs are

Standard Cost Systems

Based on carefullypredetermined amounts.

Used for planning labor, materialand overhead requirements.

The expected levelof performance.

Benchmarks formeasuring performance.


Standard cost systems1

Standard cost

Standard Cost Systems

A standard cost varianceis the amount by whichan actual cost differs fromthe standard cost.

Amount

DirectMaterial

DirectLabor

ManufacturingOverhead

Type of Product Cost


Standard cost systems2

Standard cost

Standard Cost Systems

This variance isfavorablebecausethe actual costis less thanthestandard cost.

This variance is unfavorable because the actual cost exceeds the standard cost.

Amount

DirectMaterial

DirectLabor

ManufacturingOverhead

Type of Product Cost


Variance analysis

Variance Analysis

Takecorrective actions

Identifyquestions

Receive explanations

Conduct next period’s operations

Analyze variances

Prepare standard cost performance report

Begin


Learning objective1

Learning Objective

To explain the differencebetween setting idealstandards and settingreasonably achievablestandards.

LO2


Establishing and revising standard costs

Normal standards should beset at levels that are currentlyattainable with reasonable and

efficient effort.

Should we usenormal standardsor ideal standards?

Establishing and RevisingStandard Costs

Productionmanager

ManagerialAccountant

Engineer


Establishing and revising standard costs1

I agree. Ideal standards, that are based on perfection, areunattainable and therefore discouraging to most employees.

Establishing and RevisingStandard Costs

HumanResourcesManager


Use of standard costs in developing budgets

  • A standard is the expected cost for one unit.

  • A budget is the expected cost for all units.

Use of Standard Costs in Developing Budgets

Are standards the same as budgets?


Direct material standards

Use competitivebids for the qualityand quantity desired.

Use product design specifications.

Direct Material Standards

PriceStandards

QuantityStandards


Direct material standards1

Direct Material Standards

The standard material cost for one unit of product is:

standard quantity standard price for of material one unit of material required for one unit of product

×


Direct labor standards

Use wage surveys andlabor contracts.

Use time and motion studies foreach labor operation.

Direct Labor Standards

RateStandards

TimeStandards


Setting direct labor standards

Setting Direct Labor Standards

The standard labor cost for one unit of product is:

standard number standard wage rate of labor hours for one hour for one unit of product

×


Manufacturing overhead standards

The rate is basedon an estimate of totaloverhead at the normallevel of activity.

The activity is the cost driver used to calculate the overhead rate.

Manufacturing Overhead Standards

RateStandards

ActivityStandards


Manufacturing overhead standards1

The standard overhead cost for one unit of product is:

standard variable standard number overhead rate for of activity units one unit of for one unit of activity product

×

Manufacturing Overhead Standards

×


A general model for variance analysis

Standard Cost Variances

Price Variance

Quantity Variance

The difference betweenthe actual price and thestandard price

The difference betweenthe actual quantity andthe standard quantity

A General Model forVariance Analysis


A general model for variance analysis1

A General Model forVariance Analysis

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

Price Variance

Quantity Variance

Standard price is the amount that should have been paidfor the resources acquired.


A general model for variance analysis2

A General Model forVariance Analysis

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

Price Variance

Quantity Variance

Standard quantity is the quantity that should have been used for the actual good output.


Learning objective2

Learning Objective

To compute direct materialsand direct laborvariances and explainthe meaning of each.

LO3


Material price and quantity variances

Material Price and Quantity Variances

ActualQuantity ActualQuantityStandardQuantity× × × ActualPrice StandardPrice StandardPrice

Price Variance

Quantity Variance

AQ(AP - SP) SP(AQ - SQ)

AQ = Actual Quantity SP= Standard PriceAP = Actual Price SQ = Standard Quantity

Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance


Standard costs and variance analysis an illustration

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

1.5 pounds per Zippy at $4.00 per pound

Records last week show 1,700 pounds of material were purchased on May 10 at a total cost of $6,630. The material was used to make 1,000 Zippies that were completed on May 15.

Zippy

Standard Costs and Variance Analysis: An Illustration


Material variances question 1

Theactual priceper pound paid forthe material was

a.$4.00 per pound.

b.$4.10 per pound.

c.$3.90 per pound.

d.$6.63 per pound.

Zippy

Material VariancesQuestion 1


Material variances question 11

Theactual price per pound paid forthe material was

a.$4.00 per pound.

b.$4.10 per pound.

c.$3.90 per pound.

d.$6.63 per pound.

Zippy

Material VariancesQuestion 1

AP = $6,630 ÷ 1,700 lbs.AP = $3.90 per lb.


Material variances question 2

Zippy

Material VariancesQuestion 2

Hanson’s material price variance (MPV)for the week was

a.$170 unfavorable.

b.$170 favorable.

c.$800 unfavorable.

d.$800 favorable.


Material variances question 21

Zippy

Material VariancesQuestion 2

Hanson’s material 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


Material variances question 3

Thestandard quantity of material thatshould have been used to produce1,000 Zippies is

a.1,700 pounds.

b.1,500 pounds.

c.2,550 pounds.

d.2,000 pounds.

Zippy

Material VariancesQuestion 3


Material variances question 31

Thestandard quantity of material thatshould have been used to produce1,000 Zippies is

a.1,700 pounds.

b.1,500 pounds.

c.2,550 pounds.

d.2,000 pounds.

Zippy

Material VariancesQuestion 3

SQ = 1,000 units × 1.5 lbs per unit SQ = 1,500 lbs


Material variances question 4

Zippy

Material VariancesQuestion 4

Hanson’s material quantity variance (MQV) for the week was

a.$170 unfavorable.

b.$170 favorable.

c.$800 unfavorable.

d.$800 favorable.


Material variances question 41

Zippy

Material VariancesQuestion 4

Hanson’s material 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


Material variances summary

Zippy

Material VariancesSummary

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

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

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

Price variance$170 favorable

Quantity variance$800 unfavorable


Labor rate and efficiency variances

Let’s turn our attention to labor variances.

Labor Rate and Efficiency Variances


Labor rate and efficiency variances1

Labor Rate and Efficiency Variances

ActualHoursActualHoursStandardHours× × × ActualRate StandardRate StandardRate

Rate Variance

Efficiency Variance

AH(AR - SR) SR(AH - SH)

AH = Actual Hours SR= Standard RateAR = Actual Rate SH = Standard Hours

Materials price variance Materials quantity varianceLabor rate variance Labor efficiency varianceVariable overhead Variable overhead spending variance efficiency variance


Standard costs and variance analysis an illustration1

Zippy

Standard Costs and Variance Analysis: An Illustration

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

1.5 standard hours per Zippy at $8.00 per hour

Payroll records last week show 1,450 hours were worked at a total labor cost of $11,890 to make 1,000 Zippies that were completed on May 15.


Labor variances question 1

Zippy

Labor VariancesQuestion 1

Hanson’sactual rate (AR) for laborfor the week was

a.$8.20 per hour.

b.$8.00 per hour.

c.$7.80 per hour.

d.$7.60 per hour.


Labor variances question 11

Zippy

Labor VariancesQuestion 1

Hanson’sactual rate (AR) for laborfor the week was

a.$8.20 per hour.

b.$8.00 per hour.

c.$7.80 per hour.

d.$7.60 per hour.

AR = $11,890 ÷ 1,450 hours AR = $8.20 per hour


Labor variances question 2

Zippy

Labor VariancesQuestion 2

Hanson’s labor rate variance (LRV) forthe week was

a.$290 unfavorable.

b.$290 favorable.

c.$400 unfavorable.

d.$400 favorable.


Labor variances question 21

Zippy

Labor VariancesQuestion 2

Hanson’s labor rate variance (LRV) forthe week was

a.$290 unfavorable.

b.$290 favorable.

c.$400 unfavorable.

d.$400 favorable.

LRV = AH(AR - SR) LRV = 1,450 hrs($8.20 - $8.00) LRV = $290 unfavorable


Labor variances question 3

Zippy

Labor VariancesQuestion 3

Thestandard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is

a.1,550 hours.

b.1,500 hours.

c.1,700 hours.

d.1,800 hours.


Labor variances question 31

Zippy

Labor VariancesQuestion 3

Thestandard hours (SH) of labor thatshould have been worked to produce1,000 Zippies is

a.1,550 hours.

b.1,500 hours.

c.1,700 hours.

d.1,800 hours.

SH = 1,000 units × 1.5 hours per unit SH = 1,500 hours


Labor variances question 4

Zippy

Labor VariancesQuestion 4

Hanson’s labor efficiency variance (LEV) for the week was

a.$290 unfavorable.

b.$290 favorable.

c.$400 unfavorable.

d.$400 favorable.


Labor variances question 41

Zippy

Labor VariancesQuestion 4

Hanson’s labor efficiency variance (LEV) for the week was

a.$290 unfavorable.

b.$290 favorable.

c.$400 unfavorable.

d.$400 favorable.

LEV = SR(AH - SH) LEV = $8.00(1,450 hrs - 1,500 hrs) LEV = $400 favorable


Labor variances summary

Zippy

Labor VariancesSummary

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

1,450 hours 1,450 hours 1,500 hours × × × $8.20 per hour $8.00 per hour $8.00 per hour

$11,890 $11,600 $12,000

Rate variance$290 unfavorable

Efficiency variance$400 favorable


Learning objective3

Learning Objective

To compute overhead variances and explainthe meaning of each.

LO4


Manufacturing overhead variances

Recall that overhead costs are applied to products and services using apredetermined overhead rate (POHR):

Estimated total overhead costsEstimated activity

Manufacturing Overhead Variances

Applied Overhead = POHR × Standard Activity

POHR =


Manufacturing overhead variances1

Manufacturing Overhead Variances

Contains fixedoverhead thatremains constant asactivity changes.

Contains variableoverhead thatincreases asactivity increases.

Overhead Rate

Function of activity levelchosen to determine rate.


Manufacturing overhead variances example

Hanson, Inc. has the following manufacturing overhead at three different levels of activity:

Zippy

Manufacturing OverheadVariances Example

Hanson applies overhead based on machine hour activity.


Overhead variances question 1

Zippy

Overhead Variances Question 1

The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:

a. $5.00 per machine hour.

b. $4.00 per machine hour.

c. $3.00 per machine hour.

d. $2.00 per machine hour.


Overhead variances question 11

Zippy

Overhead Variances Question 1

The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:

a. $5.00 per machine hour.

b. $4.00 per machine hour.

c. $3.00 per machine hour.

d. $2.00 per machine hour.

$15,000 ÷ 3,000 machine hours


Overhead variances question 12

Zippy

Overhead Variances Question 1

The total overhead rate for an estimated activity of 3,000 machine hours (MH) is:

a. $5.00 per machine hour.

b. $4.00 per machine hour.

c. $3.00 per machine hour.

d. $2.00 per machine hour.

$15,000 ÷ 3,000 machine hours

The $5.00 overhead rate containsa variable portion:

$6,000 ÷ 3,000 MH = $2.00 per MH

and afixed portion:

$9,000 ÷ 3,000 MH = $3.00 per MH


Manufacturing overhead variances2

Manufacturing Overhead Variances

Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours

Spending Variance

VolumeVariance


Manufacturing overhead variances3

Manufacturing Overhead Variances

Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours

Shows how economicallyoverhead services werepurchased and howefficiently overheadservices were used.

Contains both fixedand variable costs.

A controllable variance.

Spending Variance

VolumeVariance


Manufacturing overhead variances4

Manufacturing Overhead Variances

Budgeted Applied Actual Overhead at Overhead at Overhead Actual Activity Standard Hours

Caused by producing ata level other than thatused for computing thestandard overhead rate.

Contains only fixed costs.

Spending Variance

VolumeVariance


Manufacturing overhead variances example1

Hanson’s actual production for theperiod was 1,600 Zippies resulting in 3,200 standard machine hours. Actual total overhead cost for the period was $15,450.

Compute the overhead spending and volume variances.

Zippy

Manufacturing OverheadVariances Example


Manufacturing overhead variances example2

Zippy

Manufacturing OverheadVariances Example

Budgeted Applied Actual Overhead at Overhead at Overhead Standard Hours Standard Hours

$15,450 $9,000 fixed 3,200 hrs. + × $6,400 variable $5.00 per hr.

$2.00 per hr. × 3,200 hrs.


Manufacturing overhead variances example3

Zippy

Manufacturing OverheadVariances Example

Budgeted Applied Actual Overhead at Overhead at Overhead Standard Hours Standard Hours

$15,450 $9,000 fixed 3,200 hrs. + × $6,400 variable $5.00 per hr.

$15,450 $15,400 $16,000

Spending variance$50 unfavorable

Volume variance$600 favorable


Disposing of variances

Standard Cost Variances

Immaterial Amounts

Material Amounts

Disposing of Variances

Close byapportioning to:

Close toCost of Goods Sold

  • Work in Process

  • Finished Goods

  • Cost of Goods Sold


Advantages of standard costs

Advantages

Advantages of Standard Costs

Possible reductionsin production costs.

Improved cost control and performanceevaluation.

Better informationfor planning anddecision making.


Disadvantages of standard costs

Disadvantages

Disadvantages of Standard Costs

Emphasis onnegativeexceptions mayimpact morale.

It may be difficultto determinewhich variancesare significant.

Emphasis on negativeexceptions maylead to under-reporting.


Learning objective4

Learning Objective

To discuss the causes ofspecific cost variances.

LO5


Responsibility for material variances

You used too much material because of poorly trained workers and poorly maintained equipment.

Also, your poor scheduling sometimes requires me to rush order material at a higher price, causing unfavorable price variances.

Responsibility forMaterial Variances

I am not responsible for this unfavorable materialquantity variance.

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

Production Manager

Purchasing Agent


Responsibility for labor variances

You used too much time because of poorly trained workers and poor supervision.

Responsibility for Labor Variances

I am not responsible for the unfavorable laborefficiency variance!

You purchased cheapmaterial, so it took moretime to process it.

Production Manager

Purchasing Agent


Responsibility for labor variances1

Responsibility for Labor Variances

Maybe I can attribute the laborand material variances to personnel for hiring the wrong peopleand training them poorly.

Production Manager


Responsibility for labor variances2

Responsibility for Labor Variances

Using highly paid skilled workers toperform unskilled tasks results in anunfavorable rate variance.

High skill,high rate

Low skill,low rate

Production managers who make work assignmentsare generally responsible for rate variances.


Responsibility for labor variances3

Poorlytrainedworkers

Poorqualitymaterials

Poorsupervisionof workers

Poorlymaintainedequipment

Responsibility for Labor Variances

UnfavorableEfficiencyVariance


Summary of variance computations and manager responsibilities

Summary of Variance Computations and Manager Responsibilities


Jit systems and variance analysis

JIT Systems and Variance Analysis

JIT systems may reduce unfavorable variances.

Long-term agreementswith suppliers eliminateprice variances.

Well-trained flexiblework force reduces laborefficiency variance.

Emphasis on qualityreduces materialquantity variances.


Ethics fraud and corporate governance

Ethics, Fraud, andCorporate Governance

For a company using standard costing systems, the accuracy of the inventory and cost of goods sold figures reported in the company’s financial statements is dependent on the reliability of the standard cost numbers.

A company’s financial statements can be materially misstated when standard costs are not representative of manufacturing costs incurred.


End of chapter 24

End of Chapter 24


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