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WEEK 2. STANDARD COSTING. LEARNING OBJECTIVES. Define standard cost Explain how standard are set Compute the standard cost of actual or equivalent units produced Compute standard cost variances for materials, labor and FOH. STANDARD COST.

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learning objectives
LEARNING OBJECTIVES
  • Define standard cost
  • Explain how standard are set
  • Compute the standard cost of actual or equivalent units produced
  • Compute standard cost variances for materials, labor and FOH
standard cost
STANDARD COST

Is the predetermined cost of manufacturing a single unit or a specific quantity of product under current or anticipated operating conditions

( Carter and Usry, 2002)

standard costs are used for
Standard Costs are used for:
  • Established budgets
  • Controlling costs by motivating employee and measuring operating efficiency
  • Simplifying costing procedures and expediting cost reports
  • Assigning cost to materials, work in progress and finished good in inventory
  • Establish contract bids and setting sales price
determining standard cost variance
Determining Standard Cost Variance

1. Material Standard and Variance:

a. Material purchase price variance

b. Material price usage variance

c. Material inventory variance

d. Material quantity (or usage) variance

2. Labor Standard and Variance

a. Labor rate (wage or cost) variance

b. Labor efficiency variance

3. Factory Overhead Standard and Variance

a. Overall or net FOH Variance

b. Two-variance method

c. Three-variance method

d. Four-variance method

1 material standard and variance
1. Material Standard and Variance
  • Material purchase price variance =

( Qt x C.act ) – ( Qt x C. st) or (C.act – C.st) Qt

C.act > C.st = Unfavorable

C.act < C.st = Favorable

slide7

b. Material price usage variance =

( Qt. used x C.act ) – ( Qt. used x C. st)

or (C.act – C.st) Qt.used

C.act > C.st = Unfavorable

C.act < C.st = Favorable

slide8

c. Material inventory variance =

( Qt. purchased x C.st ) – ( Qt. used x C. st)

or (Qt. purchased – Qt.used) C.st

Qt. purchased > Qt. used = Unfavorable

Qt. purchased < Qt. used = Favorable

slide9

d. Material quantity (or usage) variance =

( Qt. used x C.st ) – ( Qt. st x C. st)

or (Qt.used – Qt.st) C.st

Qt. used > Qt. st = Unfavorable

Qt. used < Qt. st = Favorable

2 labor standard and variance
2. Labor Standard and Variance
  • Labor rate (wage or cost) variance =

( H. act x R. act ) - ( H. act x R. st )

or ( R.act – R.st) H.act

R. act > R. st = Unfavorable

R. act < R. st = Favorable

slide11

b. Labor efficiency variance =

( H. act x R. st ) – ( H. st x R. st) or

(H.act – H.st) R.st

H. act > H. st = Unfavorable

H. act < H. st = Favorable

3 factory overhead standard and variance
3. Factory Overhead Standard and Variance
  • Overall or net FOH Variance =

FOH. act – FOH. st

FOH. act > FOH. st = Unfavorable

FOH. Act < FOH. st = Favorable

slide13

b. Two-variance method

  • Controllable Variance =

FOH.act – ( FOH.var +FOH.fx)

FOH.act > ( FOH.var +FOH.fx) = Unfavorable

FOH.act < ( FOH.var +FOH.fx) = Favorable

slide14

2. Volume Variance =

( FOH.var +FOH.fx) – FOH.wip.st

( FOH.var +FOH.fx) > FOH.wip.st = UF

( FOH.var +FOH.fx) < FOH.wip.st = F

Controllable variance + Volume variance = Overall or net FOH Variance

slide15

3. Three – variance Methods

  • Spending Variance =

FOH.act – (FOH.var1+FOH.fx)

FOH.act > (FOH.var1+FOH.fx) = UF

FOH.act < (FOH.var1+FOH.fx) = F

Notes: FOH.var1 = on actual hours

slide16

b. Variable Efficiency Variance =

(FOH.var1+FOH.fx) - ( FOH.var +FOH.fx)

(FOH.var1+FOH.fx) > ( FOH.var +FOH.fx) = UF

(FOH.var1+FOH.fx) < ( FOH.var +FOH.fx) = F

slide17

c. Volume Variance

Spending var + Variable efficiency var + Volume var = Overall FOH variance

slide18

4. Four-Variance Method

  • Fixed efficiency variance

(H.act x FOH.fx.r) – (H.st x FOH.fx.r)

(H.act x FOH.fx.r) > (H.st x FOH.fx.r)= UF

(H.act x FOH.fx.r) < (H.st x FOH.fx.r) = F

FOH.fx.r = Fixed FOH rate

slide19

b. Idle Capacity Variance =

(FOH.var1+FOH.fx) – (H.act x FOH.r)

(FOH.var1+FOH.fx) > (H.act x FOH.r) = UF

(FOH.var1+FOH.fx) < (H.act x FOH.r) = F

slide20

c. Spending Variance

d. Variable efficiency Variance

Fixed Efficiency Var + Idle Cap Var + Spending Var + Variable eff.var = Overall FOH var

reference
REFERENCE

Carter,W& Usry, M, 2002, Cost Accounting, 13th Edition, Thompson Learning