Chapter 10: Standard Costing and Performance Measures for Today’s Manufacturing Environment. Standard Costing Direct-material price and quantity variances Material purchase price variances and material usage variances Direct-labor rate and efficiency variances Problems.
Standard Costing: a predetermined cost for the production of goods or services, which serve as a benchmark against which to compare the actual cost.
Cost Variance: difference between actual and standard cost.
Favorable Variance: when the variance between standard and actual costs are good for the company.
Unfavorable Variance: when the variance between standard and actual costs are not good for the company.
Variance Analysis: 1- from a product costing perspective, to understand what is causing the variances.
2- from a managerial control and responsibility perspective to provide the proper incentive for managers
Standard Direct total amount of material normally required
Material Quantity: to produce a finished product (including
allowances for waste and inefficiency.
Standard Direct total delivered cost, after subtracting any
Material Price: purchase discounts.
Standard Direct number of hours normally needed to
Labor Quantity: manufacture one unit or product
Standard Direct total hourly cost of compensation, including
Labor Rate: fringe benefits.
SP = Standard price of input
SQ = Standard quantity input units/outputs (e.g. four tires/car)
SQA = Standard quantity allowed for acutal units produced
AQP = Actual quantity purchased
AQU = Actual quantity used (produced)
AP = Actual price
Direct Material Price Variance = (AP-SP) * AQP
Direct Material Quantity Variance = (AQU-SQA)*SP
Direct Materials Budget Variance = Price variance - Quantity Variance
(These formulas apply similarly for direct labor)
Total Costs are broken down for Analysis