akaun chapter 11

KE1013 Chapter Eleven 1

Chapter Eleven

VARIANCE ANALYSIS

AND

STANDARD COSTING


Outline

• The usage of standard costing

• Setting of standard cost and types of

standard

• Calculation of variance:

– Direct material

– Direct labor

– Factory overhead


Standard Costing

The cost that has been pre-determined after considering other factors.

Those are estimated costs which are considered to be ideal for each of the cost component ( direct

material, direct labor and factory overhead ).

The standard cost system enable the management to determine how much a product should cost.


The usage of standard costing

Planning and controlling:

Product costing:

Compare actual cost & budgeted cost

Improve performance

Increase efficiency

Provide readily available unit cost

information


Setting of Standard Cost

Analysis on the historical cost experience:Provide initial guidelines for standard setting

Engineering studies:Determine the most efficient way to operate

Input from operating personnel:Accountable for meeting the standards

Involve joint efforts on:


Types of Standards

Ideal standard

Normal standard

Maximum efficiency

Can be achieved if everything operates perfectly.

Currently attainable standard

Allowance is made for breakdown, interruptions etc..


Variance Analysis

Variances are the difference between the actual manufacturing cost and the standard cost at the actual level of production.

The significance of the variance for each element in manufacturing cost needs further analysis to determine the corrective actions.


Calculation of variance

Direct material

Direct labor

Factory overhead


Standard Cost

The expected cost per unit product

Illustration 1:

The followings are the standard cost for each unit (bottle) of peanut butter produced by Syarikat Sedap Selalu :


Standard Standard Standard Cost Price Usage RM

Direct material:

PeanutButterSugar

Direct labor:

Machine operatorPackaging

Factory OH:

Variable costsFixed costs

Standard cost per unit

2.80/kg 0.15kg 0.422.70/kg 0.10kg 0.271.20/kg 0.25kg 0.30

0.99

4.00/hour 0.02hour

3.00/hour 0.01hour

0.080.03

0.11

5.00/hour 0.01hour

12.00/hour 0.01hour

0.05

0.12 0.17

1.27


If Syarikat Sedap Selalu produces 10,000 bottles of peanut butter, the expected total cost would be:

Direct material

Direct labor

Factory overhead

Total cost

10,000 x 0.99 9,900

10,000 x 0.11

10,000 x 0.17

1,100

1,700

12,700


Calculation of variance

Cost element Actual cost Standard cost Variance

Direct material

Direct labor

Factory overhead

9,900

1,100

1,700

9,500 400 (F)

1,050 50 (F)

2,000 300 (U)

F = (Favorable) U = (Unfavorable)


Direct Material Variance

Direct Material Price Variance

Direct Material Usage (Quantity) Variance

To measure the difference between the actual cost and the standard cost of direct materials.


1. Direct material price variance

(Actual Price x Actual Quantity) - (Standard Price x Actual Quantity)

Simplified to be:

Actual Quantity (Actual Price – Standard Price)

AQ ( AP – SP )


2. Direct material usage (quantity) variance

(Standard Price x Actual Quantity) - (Standard Price x Standard Quantity)

Simplified to be:

Standard Price (Actual Quantity – Standard Quantity)

SP ( AQ – SQ )


Actual Price x Actual Qty Std Price x Actual Qty Std Price x Std Qty

Price Variance Usage Variance

Direct material variance


Illustration 2

The followings are the actual price and quantity for direct material used by the company in producing 10,000 bottles of peanut butter:

Actual Price Actual Quantity

Peanut RM2.70/kg 1,400kg

Butter RM2.505/kg 1,200kg

Sugar RM1.18/kg 2,300kg


Direct material price variance:

Peanut: 1,400 (2.70 – 2.80) = 140 (F)

Butter: 1,200 (2.505 – 2.70) = 234 (F)

Sugar: 2,300 (1.18 – 1.20) = 46 (F)

420 (F)

AQ ( AP – SP )


Direct material usage variance:

Peanut: 2.80 (1,400 – 1,500) = 280 (F)

Butter: 2.70 (1,200 – 1,000) = 540 (U)

Sugar: 1.20 (2,300 – 2,500) = 240 (F)

20 (U)Therefore ,

Total direct material variance = 420 (F) + 20 (U)

= 400 (F)

SP ( AQ – SQ )


Direct Labor Variance

Direct Labor Rate Variance

Direct Labor Efficiency Variance

Measures the differences between the actual cost and the cost that suppose to be paid to the labor.


1. Direct Labor Rate Variance

(Actual Hour x Actual Rate) - (Actual Hour x Standard Rate)

Simplified to be:

Actual Hour ( Actual Rate – Standard Rate )

AH ( AR – SR )


2. Direct Labor Efficiency Variance

(Standard Rate x Actual Hour) - (Standard Rate x Standard Hour)

Simplified to be:

Standard Rate ( Actual Hour – Standard Hour )

SR ( AH – SH )


Actual Hour x Actual Rate Std Hour x Actual Rate Std Hour x Std Rate

Rate Variance Efficiency Variance

Direct Labor Variance


Illustration 3:

The followings are actual rate and labor hour in the production of 10,000 bottles of peanut butter:

Actual labor rate Actual labor hour

Machine operator RM3.90/hour 190 hours

Packaging RM2.81/hour 110 hours


Direct Labor Rate Variance:

Machine Operator: 190 (3.90 – 4.00 ) = 19 (F)

Packaging: 110 (2.81 – 3.00) = 21 (F)

40 (F)

AH ( AR – SR )


Direct Labor Efficiency Variance:

Machine Operator: 4.00 (190 – 200) = 40 (F)

Packaging: 3.00 (110 – 100) = 30 (U)

10 (F)

SR ( AH – SH )

Therefore,

total direct labor variance: = 40 (M) + 10 (M)

= 50 (M)


Factory Overhead Variance

Variable Factory Overhead Controllable Variance

Fixed Factory Overhead Volume Variance

Measures the differences between the actual cost and the supposed related cost of factory overhead.


Western Rider Inc.Factory Overhead Cost Budget

For the Month Ended June 30, 2003

Direct Labor Hours4,000 4,500 5,000

80% 90% 100%

Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.

Overhead is applied at $6.00 per direct labor hour based on estimated 5,000 total hours.

Total variable costs $14,400 $16,200 $18,000Variable costs per hour $ 3.60 $ 3.60$3.60Total fixed costs $12,000 $12,000 $12,000Fixed costs per hour $ 3.00 $ 2.67 $ 2.40Total costs per hour $ 6.60 $ 6.27 $ 6.00$ 6.00

% of Normal Capacity


Western Rider Inc.Factory Overhead Variances


Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours)Total costs $24,000 $22,400 $1,600 F

Revised ActualBudget Costs Variance

Factory overhead applied at $6.00 per direct labor hour based on 4,000 actual hours.

Factory overhead applied at $6.00 per direct labor hour based on 4,000 actual hours.

Actual factory overhead per general ledger.

Actual factory overhead per general ledger.

Actual Hour4,000





Variable costs $14,400 $10,400 $4,000$4,000 FF ($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,400 U ($2.40 x 4,000 hours)Total costs $24,000 $22,400 $1,600 F

Controllable variance based on variable costs

Controllable variance based on variable costs





Volume variance based on fixed costs

Volume variance based on fixed costs

Variable costs $14,400 $10,400 $4,000 F ($3.60 x 4,000 hours)Fixed costs 9,600 12,000 2,4002,400 UU ($2.40 x 4,000 hours)Total costs $24,000 $22,400 $1,600 F


Variable Factory Overhead Controllable VarianceFor the Month Ended June 30, 2003

Actual variable overhead $10,400 Budgeted variable overhead 14,400 (4,000 actual hours x $3.60) Favorable controllable variance $(4,000)

Controllable variance measures the efficiency of using variable overhead resources.

Controllable variance measures the efficiency of using variable overhead resources.

A revised budget based on the actual hours used

A revised budget based on the actual hours used


Fixed Factory Overhead Volume VarianceFor the Month Ended June 30, 2003

Budgeted volume (direct labor hours) 5,000Actual volume (direct labor hours) 4,000Capacity not used (direct labor hours) 1,000Standard fixed rate x $2.40Unfavorable volume variance $2,400

Volume variance measures the utilization of fixed overhead resources.

Volume variance measures the utilization of fixed overhead resources.

Rate based on 5,000 direct labor hours.

Rate based on 5,000 direct labor hours.

akaun chapter 11

Career

costs standard cost

standard cost analysis

standard cost system

actual cost budgeted

expected cost

actualmanufacturing

attainable standard

historical cost experience