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Chapter 10 Standard Costing

Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney. Chapter 10 Standard Costing. Learning Objectives (1 of 2). Explain why standard cost systems are used Describe how standards are set for material, labor, and overhead

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Chapter 10 Standard Costing

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  1. Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney Chapter 10 Standard Costing

  2. Learning Objectives (1 of 2) • Explain why standard cost systems are used • Describe how standards are set for material, labor, and overhead • List the documents that are associated with standard cost systems • Explain the information that those documents provide • Calculate and record material, labor, and overhead variances

  3. Learning Objectives (2 of 2) • Explain how variance analysis can be used for control and performance evaluation • Contrast the traditional labor and overhead elements to a single conversion element • (Appendix) Explain how multiple material and labor categories affect variances

  4. Actual Costs Incurred Standard Cost Systems • Manufacturing • Service • Not-for-Profit • Record standard and actual costs in the accounting records

  5. 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

  6. Material Standards • Types, quantity, quality of materials used • Product specifications, observation, inquiry • Bill of Materials • Balance cost, quality, and projected sales price Standard Material = Quantity * Unit Purchase Price Cost

  7. Labor Standards • Types, quantity, cost of labor used • Production, setup, cleanup, and rework • Time and motion studies, industrial engineering studies • Operations Flow Document • Include wages, taxes, and fringe benefits Standard Labor = Hours * Wage Rate Cost

  8. Overhead Standards • Predetermined factory overhead application rates Standard Standard Direct Materials Cost Standard Direct Labor Card Manufacturing Overhead

  9. Actual price of actual production inputs Standard price of standard production inputs Total Variance* Total Variance Total actual cost incurred minus total standard cost applied to output produced *Favorable or unfavorable

  10. AP x AQ SP x SQ Total Variance Total Variance Inputs Outputs AP =actual price per unit of materials or hours of labor AQ = actual quantity of materials or hours of labor SP = standard price per unit of materials or hours of labor SQ = standard quantity of materials or hours of labor

  11. AP x AQ SPx AQ SP x SQ Price Variance Total Variance Price Variance What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable

  12. AP x AQ SPx AQ SP x SQ Usage Variance Total Variance Usage Variance What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable

  13. AP x AQ SPx AQ SP x SQ MPV Total Variance Material Price Variance What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable

  14. Material Price Variance • Calculate Material Price Variance at • point of purchase, or • when materials used

  15. AP x AQ SPx AQ SP x SQ MQV Total Variance Material Quantity Variance What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable

  16. AP x AQ SPx AQ SP x SQ LRV Total Variance Labor Rate Variance What was paid What should have been paid (AP - SP) x AQ* *Favorable or unfavorable

  17. AP x AQ SPx AQ SP x SQ LEV Total Variance Labor Efficiency Variance What was used What should have been used for level of output (AQ - SQ) x SP* *Favorable or unfavorable

  18. Overhead Rates • Capacity Levels • Theoretical capacity • Practical capacity • Normal capacity • Expected capacity • Flexible budgets • Expected overhead costs at different activity levels

  19. Variable Overhead Actual variable overhead is total of various ledger accounts SP = Predetermined variable overhead rate Fixed Overhead Actual fixed overhead is total of various ledger accounts SP = Predetermined fixed overhead rate Overhead Variances

  20. Actual VOH Budgeted VOH Applied VOH AP X AQ 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

  21. VOH Spending Variance • Caused by price differences • managers have little control over prices • Caused by shrinkage or waste • managers should be held accountable

  22. 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

  23. FOH Spending Variance • Calculate variance for each component • Caused by price differences • May reflect mismanagement of resources

  24. FOH Volume Variance • 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

  25. Alternative Overhead Variance Approaches • One variance • Two variance • Three variance • Four variance

  26. Standard Cost of OH Actual OH SP x SQ Total OH Variance One Variance Approach

  27. Actual OH Budgeted OH based on Standard Quantity Standard Cost of OH SP x SQ Budget Variance Volume Variance Total OH Variance Two Variance Approach

  28. Budgeted OH Actual OH Standard OH based on Actual Inputs based on Standard Quantity SP x SQ OH Spending Variance OH Efficiency Variance Volume Variance Total OH Variance Three Variance Approach

  29. Budgeted OH Actual OH Standard OH based on Actual Inputs based on Standard Quantity SP x SQ VOH & FOH Spending Variances VOH Efficiency Variance Volume Variance Total OH Variance Four Variance Approach

  30. Standard Cost Journal Entries • Variances recorded in accounting system • Favorable variances • Credits • Represent savings in production costs • Unfavorable variances • Debits • Represent excess production costs • Inventories are recorded at standard costs

  31. Purchase of Materials(Point of Purchase Method) At Standard Cost Materials Price Variance Accts Pay Materials SP x AQ purchased U F AP x AQ purchased Debit - Unfavorable Credit - Favorable

  32. Use of Materials At Standard Cost Materials Quantity Variance Materials WIP SP x AQ used SP x SQ allowed U F Debit - Unfavorable Credit - Favorable

  33. Record Labor Labor Efficiency Variance At Standard Cost Labor Rate Variance U F U F Wages Pay WIP AP x AQ SP x SQ allowed Debit - Unfavorable Credit - Favorable

  34. Apply Overhead Throughout the Year FOH VOH WIP SP x SQ Allowed SP x SQ Allowed SP x SQ Allowed

  35. VOH Actual Applied --------------- Year-End Treatment for VOH VOH Efficiency Variance VOH Spending Variance Enter a debit or credit to bring balance to zero Debit - Unfavorable Credit - Favorable

  36. Year-End Treatment for FOH FOH Spending Variance Volume Variance FOH Actual Applied ------------- Enter a debit or credit to bring balance to zero Debit - Unfavorable Credit - Favorable

  37. Material Price Variance Raw Materials WIP Finished Goods Cost of Goods Sold All other variances WIP Finished Goods Cost of Goods Sold Year-End Treatment of Variances Immaterial - Adjust Cost of Goods Sold Material - Prorate variances to

  38. Why Use Standard Cost Systems • Clerical Efficiency • Motivation • Planning • Controlling - variance analysis • Decision Making • Performance Evaluation

  39. Setting Standards • Appropriateness • Attainability • Expected standards • Practical standards • Ideal standards

  40. Trends in Standards • Ideal Standards and Theoretical Capacity • Adjusting standards • Price variance on purchase versus usage • Decline in direct labor content

  41. Conversion Costs • Combine direct labor and manufacturing overhead • Variances • Spending variance for overhead • Efficiency variances for machinery and production costs • Volume variances for production

  42. Mix and Yield Variances • Mix Variance measures effect of changing the mix of materials or labor • Yield Variance measures the difference between actual and standard inputs for the output achieved • Mix Variance plus Yield Variance equals the Quantity Variance

  43. Material Mix and Yield Variances AM x AQ x AP SM x AQ x SP SM x SQ x SP AM x AQ x SP Material Yield Variance Material Mix Variance Material Price Variance What should have been used for level of output AM - Actual Mix SM - Standard Mix

  44. Labor Mix and Yield Variances AM x AH x AR SM x SH x SR SM x AH x SR AM x AH x SR Labor Yield Variance Labor Mix Variance Labor Rate Variance M - Mix H - Hours R - Rate What should have been used for level of output

  45. Questions • How are standards set for material, labor, and overhead? • How is variance analysis used for control and performance evaluation? • Why are labor and overhead elements sometimes combined into a single conversion element?

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