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Chapter 7: Standard Costing and Variance Analysis. Cost Accounting: Foundations & Evolutions, 9e Kinney and Raiborn. Learning Objectives . Why are standard cost systems used? How are material, labor, and overhead standards set?

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Presentation Transcript
slide1

Chapter 7:Standard Costing and Variance Analysis

Cost Accounting:

Foundations & Evolutions, 9e

Kinney and Raiborn

slide2

Learning Objectives

  • Why are standard cost systems used?
  • How are material, labor, and overhead standards set?
  • How are material, labor, and overhead variances calculated and recorded?
  • How have the setting and use of standards changed over time?
  • How does the use of a single conversion element (rather than the traditional labor and overhead elements) affect standard costing?
  • (Appendix) How are variances affected by multiple material and labor categories?
why use standard cost systems
Why Use Standard Cost Systems

A standard cost system tracks both standard and actual costs. This dual recording provides an essential element to cost control: having norms against which actual operations can be compared.

  • Motivating
  • Planning
  • Controlling - variance analysis
  • Clerical efficiency
  • Decision making
  • Performance evaluation
setting standards
Setting Standards
  • Appropriateness
  • Attainability
    • Expected standards
    • Practical standards
    • Ideal standards
standards
Standards
  • Standard costs are budgeted costs to
    • manufacture a single unit of product, or
    • perform a single service
  • To develop standards, identify
    • material and labor types, quantities, and prices
    • overhead types and behavior
material standards
Material Standards
  • Materials used
    • Types
    • Quality
    • Quantity
    • Price
  • From
    • Product specifications, observation, inquiry
    • Bill of materials
  • Balance cost, quality, and projected sales price
slide7

Labor Standards

  • Labor used
    • Types
      • Production, setup, cleanup, and rework
    • Quantity
    • Cost
      • Include wages, payroll taxes, and fringe benefits
  • From
    • Industrial engineering studies including methods-time measurement (MTM), time and motion studies, and historical data
    • Operations flow document
slide8

Overhead Standards

  • Variable and fixed manufacturing overhead
  • Estimated level of activity
  • Estimated costs
  • Predetermined factory overhead application rates
slide9

AP x AQ

SP x SQ

Total Variance

Total Variance

Inputs

Outputs

AP =actual cost/price per unit of materials or hours of labor

AQ = actual quantity of materials or hours of labor

SP = standard cost/price per unit of materials or hours of labor

SQ = standard quantity of materials or hours of labor

slide10

AP x AQ

SPx AQ

SP x SQ

MPV

Total Variance

Material Price Variance (MPV)

What

was

paid

What should

have been

paid

(AP - SP) x AQ*

*Favorable or unfavorable

material price variance
Material Price Variance
  • Calculate Material Price Variance at
    • point of purchase, or
    • when materials used
slide12

AP x AQ

SPx AQ

SP x SQ

MQV

Total Variance

Material Quantity Variance (MQV)

What

was

used

What should

have been

used for

level of output

(AQ - SQ) x SP*

*Favorable or unfavorable

slide13

AP x AQ

SPx AQ

SP x SQ

LRV

Total Variance

Labor Rate Variance (LRV)

What

was

paid

What should

have been

paid

(AP - SP) x AQ*

*Favorable or unfavorable

slide14

AP x AQ

SPx AQ

SP x SQ

LEV

Total Variance

Labor Efficiency Variance (LEV)

What

was

used

What should

have been

used for

level of output

(AQ - SQ) x SP*

*Favorable or unfavorable

slide15

Actual VOH

Budgeted VOH

Applied VOH

Actual

SPx AQ

SP x SQ

VOH Spending Variance

VOH Efficiency Variance

Total VOH Variance

Variable Overhead Variances

For

actual

hours

used

What should have been

used for level of output

voh spending variance
VOH Spending Variance
  • Caused by price differences
    • managers have little control over prices
  • Caused by shrinkage or waste
    • managers should be held accountable
slide17

Actual FOH

Budgeted FOH

Applied FOH

SP x SQ

FOH Spending Variance

FOH Volume Variance

Total FOH Variance

Fixed Overhead Variances

Constant

Amount

What should have been

used for level of output

slide18

FOH Spending Variance

  • Calculate variance for each component
  • Caused by price differences
  • May reflect mismanagement of resources
foh volume variance
FOH Volume Variance
  • Calculate variance for each component
  • Measures capacity utilization
  • Caused by producing at a level that differs from the capacity level used to compute the predetermined overhead rate
  • Also called the noncontrollable variance
slide20

Questions

  • Why are standard cost systems used?
  • How are standards set for material, labor, and overhead?
  • How are material, labor and overhead variances calculated and recorded?
potential ethical issues
Potential Ethical Issues
  • Setting high standards to create favorable variances
  • Ignoring effects of one production area on another
  • Setting overhead rates too low based on high production levels to distort inventory cost and operating income
  • Producing inventory only to create a favorable volume variance
  • Not updating standards so that favorable variances are created
  • Using low quality materials or labor to create favorable variances and low quality products