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Chapter 9

Chapter 9. Standard Costing and Variances. Standard Costs are. Standard Cost Systems. Based on carefully predetermined amounts. Used for planning labor, material, and overhead requirements. The expected level of performance. Benchmarks for measuring performance.

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Chapter 9

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  1. Chapter 9 Standard Costing and Variances

  2. Standard Costs are Standard Cost Systems Based on carefullypredetermined amounts. Used for planning labor, material,and overhead requirements. The expected levelof performance. Benchmarks formeasuring performance. In a standard cost system, all manufacturing costsare recorded at standard rather than actual amounts.

  3. I recommend using attainablestandardsthat can be achieved with reasonableand efficient effort. Ideal versus Attainable Standards Should we useideal standards that require employees towork at 100 percent peak efficiency?

  4. Types of Standards

  5. Master Budgets Versus Flexible Budgets

  6. Variance Analysis This variance is unfavorable because the actual costexceeds the standard cost. These variances are favorablebecause the actual costis less thanthe standard cost. Standard Amount DirectMaterial DirectLabor ManufacturingOverhead Type of Product Cost

  7. Variance Analysis

  8. Variable Cost Variances Spending Variance Actual Costs Actual Quantity (AQ) ×Actual Price (AP) Actual Quantity (AQ) ×Standard Price (SP) Flexible Budget Standard Quantity (SQ) ×Standard Price (SP) Price Variance Quantity Variance Total Spending Variance

  9. Direct Materials Variances Materials Price Variance Materials Quantity Variance Purchasing Manager Production Manager The standard price is used to compute the quantity varianceso that the production manager is not held responsible forthe purchasing manager’s performance.

  10. Direct Labor Variances Spending Variance Actual Costs Actual Hours (AH) ×Actual Rate (AR) Actual Hours (AH) ×Standard Rate (SR) Flexible Budget Standard Hours(SH) ×Standard Rate (SR) Rate Variance Efficiency Variance Total Spending Variance

  11. Mix of skill levelsassigned to work tasks. Level of employee motivation. Quality of production supervision. Quality of training provided to employees. Responsibility for Labor Variances Production managers areusually held accountablefor labor variancesbecause they caninfluence the: Production Manager

  12. Variable Manufacturing Overhead Variances Spending Variance Actual Costs Actual Hours (AH) ×Actual Rate (AR) Actual Hours (AH) ×Standard Rate (SR) Flexible Budget Standard Hours(SH) ×Standard Rate (SR) Rate Variance Efficiency Variance Total Spending Variance

  13. Rate Variance Efficiency Variance Variable Manufacturing Overhead Variances Results from paying moreor less than expected foroverhead items and from excessive usage ofoverhead items. A function of the selected allocation measure (direct labor hours). It does not reflect overhead control.

  14. Summary of Spending Variances • Variances are always calculated by comparing actual results to budgeted, or standard, results. • Companies try to hold specific managers responsible for specific variances, while removing the effects of factors that are beyond managers’ control. • The formulas for variances allow only one factor, such as price, quantity or volume to change, while holding everything else constant at either actual or standard values (depending on the type of variance). • The driving factor for a variance always appears in parentheses in the formula, as well as in the name of the variance. For example, the formula for the direct materials price variance is AQ X (SP - AP). • Try not to memorize rules or rely on the formulas to determine whether a variance is favorable or unfavorable; just think about it. For example, paying more for material, or using more materials to produce the same number of units is unfavorable.

  15. Framework for Fixed Overhead Spending and Volume Variances

  16. Supplement 9B – Recording Standard Costs and Variances in a Standard Cost System Common Rules • The initial debit to an inventory account (Raw Materials, Work in Process, or Finished Goods) and the eventual debit to Cost of Goods Sold should be based on the standard cost, not the actual cost. • Cash, payables, or other accounts, such as accumulated depreciation or prepaid assets, should be credited for the actual cost incurred. • The difference between the standard cost (a debit) and the actual cost (a credit) should be recorded as the cost variance. • Unfavorable variances should appear as debit entries; favorable variances should appear as credit entries. • At the end of the accounting period, all the variances should be closed to the Cost of Goods Sold account to adjust the standard cost up or down to the actual cost.

  17. End of Chapter 9

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