Download - Module 10 Standard Costs
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Using Variances
under StandardCost System
ACG 2071
Module 10
Chapter 22
Fall 2007
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Standards Are performance goals.
Service, merchandising, and manufacturingbusinesses may all use standards to evaluate andcontrol operations.
Manufacturers normally use standard costs foreach of the three manufacturing costs Direct materials
Direct labor
Factory overhead
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Standard Cost Systems Accounting systems that use standards for these
costs are called standard cost systems. Management determines how much a product should
cost – Standard Cost
ow much it does cost – Actual Cost !he causes of any differences – "ariances
#hen actual costs are compared with standard costs,only the e$ceptions or variances are reported for costcontrol. Called %rinciple of &$ceptions.
Standard costs assists management in controlling costsand in motivating employees to focus on costs.
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Types of Standards Theoretical or ideal standards – achieved
only under perfect conditions
Currently attainable or normal standards –
attained with reasonable effort
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Budgetary Performance
Evaluation #hen using standard cost system, directmaterials, direct labor, and factoryoverhead are separated into two
components A price standard
A 'uantity standard
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Example Assume that Halycon Balloons produced and sold 5,000 hot air balloons.
It incurred direct material costs of $40,50, direct labor costs of$!",500, and factory o#erhead costs of $,400. The standard costs forthe company are listed belo%&
ManufacturingCosts
Standard Price StandardQuantity per
unit
StandardCost per
Unit
Direct materials $5.00 per yard 1.5 yards $7.50
Direct labor $9.00 per hour 0.80 hour per unit $7.20
Factory overhead $6.00 0.80 hour per unit $.80
!otal standard cost per unit $19.50
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Budget Performance Report
ManufacturingCosts
Actual Costs StandardCosts at ActualVolume
Cost Variance(Favorable)Unfavorable
Direct materials $40,150 $37,500 $2,650
Direct labor $38,500 $36,000 $2,500
Factoryoverhead
$22,400 $24,000 ($1,600)
!otal standardcost per unit
$101, 050 $97,500 $3,550
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Budget Performance Report Favorable cost variance occurs when the
actual cost is less than the standard cost
(nfavorable variance occurs when the
actual cost is greater than the standardcost
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Variance Analysis !ypes of variances
Direct Materials
Direct )abor
Factory *verhead
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Direct aterials Variance
Price variance (Actual price – Standard Price) X Actual uantit!
Quantity variance (Actual uantit! – Standard uantit!) X Actual Price
!otal "irect Materials Variance
uantit! "ariance # Price "ariance
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Example Material used in the production of +
Cleaner has a standard cost of - per lb.and standard use of /,/// lbs. Actual
records show 0,/// lbs were used withan actual cost of 1.0/ per lb. Computethe direct material variances.
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ExamplePrice Variance
= (Actual Price – Standard Price) X Actual Quantity
2 31.0/ – -4 5 0,/// lbs 2 6/.0/ 5 0,/// lbs
!"7#$00 %a&ora'le
Quantity Variance =(Actual Quantity – Standard Quantity) X Standard Price
2 30,/// lbs – /,/// lbs4 5 -.//
2 0,/// lbs $ -.// "1$#000 n%a&ora'leTotal direct materials variance =
Quantity variance + Price variance ' $5, 000 ( )*$+,500 = $7,500 Unfavorable
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Direct !a"or Variance
#ate variance (Actual ate – Standard ate) X Actual %&ur'
!ime variance (
Actual %&ur' – Standard %&ur') X Actual ate
!otal "irect $abor Variance ie "ariance # ate "ariance
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Example *a+ple ,- Factory records show that
each product produced re'uires - directlabor hours. %roduction during the period
consisted of /,/// units with 17,0//hours of labor used. )abor has a standardcost of / per hour and actual cost was per hour. Compute the direct labor
variances.
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Example
Rate Variance = 3Actual 8ate – Standard 8ate4 5 Actual hours
2 3 6 /4 5 17,0// hours
2 17,0// (nfavorable
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Example
Time Variance '3Actual hrs – Standard hrs4 5 Standard rate
2 917,0// hrs – 3 - $ /,///4: $ /
2 60// hours $ /
!"$#000 Fa&ora'le
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Example
Total irect labor variance '-ate #ariance ( Time #ariance
' $,500 ( )*$5,000
' $4,500 /nfa#orable
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#actory $ver%ead Variance Determine the impact of changing production on
fi$ed and variable factory overhead cost.
"ariances from standard for factory overhead costresult from; Actual variable factory overhead cost greater or less
than budgeted variable factory overhead for actualproduction Controllable variance for variable factory overhead
Actual production at a level above or below //< ofnormal capacity. "olume variance for fi$ed factory overhead
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Example Percent of normal capacity 80% 90% 100% 110%
Units produced 5,000 5,625 6,250 6,875
Direct labor hours ( .8 per unit !,000 !,500 5,000 5,500
"ud#eted factory o$erhead
%ariable costs& 'ndirect factory a#es )8,000 )*,000 )+0,000 )++,000
Poer and li#ht !,000 !,500 5,000 5,500
'ndirect materials 2,!00 2,700 ,000 ,00
-otal $ariable cost )+!,!00 )+6,200 )+8,000 )+*,800
i/ed costs&
uper$isory salaries )5,500 )5,500 )5,500 )5,500
Depreciation !,500 !,500 !,500 !,500
'nsurance 2,000 2,000 2,000 2,000
-otal fi/ed cost )+2,000 )+2,000 )+2,000 )+2,000
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Controlla"le Variance
Controlla'le .ariance
eals %ith #ariable cost
Actual variable factory overhead
6=udgeted variable factory overhead>Controllable "ariance
>at actual production level
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Example alycon produced 0,/// balloons and each
unit re'uired /.?/ standard labor hour forproduction. Actual variable factory
overhead was /,@// and fi$ed factoryoverhead was 1,/// (sing theinformation on alycon =alloons, computethe controllable variance.
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Standard direct la"or %ours
0,/// units produced $ /.?/ per hour
2 @,/// direct labor
=ased on units produced
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Variable costs per unit
.aria'le co/t/ per unit
!otal variable factory overhead
!otal hours
2 ?,/// 2 -./ per hour
0,///
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Budgeted Varia"le #actory$ver%ead Standard direct labor hours for units produced
$ Standard variable factory overhead per D)
=udgeted variable factory overhead
2 @,/// hours $ -./ 2 @,@//
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Controlla"le Variance
Actual variable factory overhead ,///
=udgeted variable factory overhead @,@//
Controllable variance ,//
(BFA"*8A=)&
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Volume Variance & #ixed
costs
//< capacity direct labor hours6Standard direct labor hours at actualCapacity not used5 standard fi$ed overhead rate
"olume variance
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Example - (sing the information on alycon =alloons,
assume actual production at ?/< capacity.Compute the volume variance.
From the factory overhead cost budget, wecompute;
Fi*ed co/t/ per unit 2 !otal fi$ed factory overhead !otal hours
2 1,/// 2 1.@/ per hour 0,/// based on 001 capacity
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Volume Variance
//< capacity direct labor hours 0,/// hours6Standard direct labor hours at actual @,/// hours
Capacity not used ,/// hours5 standard fi$ed overhead rate $ 1.@/"olume "ariance 1,@// unfavorable