standard costing: a functional-based control approach

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STANDARD COSTING: AFUNCTIONAL-BASED CONTROL

APPROACH

CHAPTER 9


CHAPTER 9 OBJECTIVES

1. Describe how unit input standards are developed, and explain why standard costing systems are adopted

2. Explain the purpose of a standard cost sheet

3. Compute and journalize the direct materials and direct labor variances, and explain how they are used for control


CHAPTER 9 OBJECTIVES

4. Compute overhead variances three different ways, and explain overhead accounting

5. Calculate mix and yield variances for direct materials and direct labor


DEVELOPING UNIT INPUT STANDARDS

• Price Standards specify how much should be paid for the quantity of the input to be used• Quantity standards specify how much of

the input should be used per unit of output• Unit standard cost is the product of these

two standardsStandard price × Standard Quantity (SP ×

SP)

LO-1



Establishing Standards•Ideal Standards demand maximum efficiency and can be achieved only if everything operates perfectly•Currently attainable standards can be achieved under efficient operating conditions

LO-1



Kaizen Standards•Continuous improvement standards •Reflect planned improvement and are a type of currently attainable standard•Have a cost reduction focus and because of their emphasis on continuous improvement, are constantly changing

LO-1



Kaizen Standards•Standards and Activity-Based Costing• An activity’s cost is determined by the amount of

resources consumed by each activity• Standard consumption patterns are identified based

on historical experience• Activity-based systems also use standards for

control, where control is specifically defined as cost reduction

• Activities are classified as either value-added or non-value-added

LO-1



Usage of Standard Costing Systems•Cost Management•Planning and Control•Decision Making and Product Costing

LO-1


EXHIBIT 9.1—COST ASSIGNMENT APPROACHES

LO-1


EXHIBIT 9.2—STANDARD COST SHEET FOR DELUXE STRAWBERRY FROZEN YOGURT

LO-2


STANDARD COST SHEETS

• Standard costs are developed for direct materials, direct labor, and overhead used in producing a product or service• Total of these standard costs yields the

standard cost per unit

• Standard cost sheet provides the detail underlying the standard unit cost

LO-2


VARIANCE ANALYSIS AND ACCOUNTING: DIRECT MATERIALS AND DIRECT LABOR

• Flexible budget : used to identify the direct material or direct labor input costs that should have been incurred for the actual level of activity• Total budget variance: the difference

between the actual cost of the input and its standard cost

Total budget variance = (AP × AQ) – (SP × SQ)

LO-3



Calculating the Direct Materials Price Variance and Direct Materials Usage Variance•Price (rate) variance: difference between the actual and standard unit prices of an input multiplied by the actual quantity of inputs•Usage (efficiency) variance: difference between the actual and standard quantity of inputs multiplied by the standard unit price of the input

LO-3



Calculating the Direct Materials Price Variance and Direct Materials Usage Variance•Unfavorable (U) variance: occurs whenever actual prices or usage of inputs are greater than standard prices or usage•Favorable (F) variance: occurs whenever actual prices or usage of inputs are less than standard prices or usage

LO-3



Calculating the Direct Materials Price Variance and Direct Materials Usage Variance•Direct materials price variance (MPV): difference between what was actually paid for direct materials and what would have been paid for the actual quantity bought if it had been bought at the standard price

MPV = (AP × AQ) – (SP × AQ)

LO-3



Calculating the Direct Materials Price Variance and Direct Materials Usage Variance

MPV = (AP – SP)AQ• if the actual price is greater than standard, the

MPV is unfavorable• if the actual price is less than the standard

price, the MPV is favorable

LO-3



Calculating the Direct Materials Price Variance and Direct Materials Usage Variance•Direct materials usage variance: the difference between the amount of materials actually used and what should have been used for the actual quantity of units produced multiplied by the standard price

MUV = (SP × AQ) – (SP × SQ)

LO-3



Calculating the Direct Materials Price Variance and Direct Materials Usage Variance

MUV = (AQ – SP)SQ• if the actual quantity is greater than standard,

the MUV is unfavorable• if the actual quantity is less than the standard

quantity, the MUV is favorable

LO-3



Timing of the Price Variance Computation•The direct materials price variance can be computed at one of two points• When the direct materials are issued for use in

production• When they are purchased

LO-3



Timing of the Direct Materials Usage Variance Computation•Direct materials usage variance should be computed as direct materials are issued for production•To facilitate this process, many companies use three forms• Standard bill of materials• Color-coded excessive usage forms• Color-coded returned-materials forms

LO-3


EXHIBIT 9.3 - STANDARD BILL OF MATERIALS

LO-3



Accounting for the Direct Materials Price and Usage Variances•In a standard costing system, all inventories are carried at standard•Direct materials price variance is computed at the point of purchase•Unfavorable variances are always debits, and favorable variances are always credits

LO-3



Accounting for the Direct Materials Price and Usage Variances•Purchase of direct materials, assuming an unfavorable MPV and that AQ is defined as direct materials purchased

Materials (SP × AQ)Direct Materials Price Variance (AP –SP)AQAccounts Payable (AP × AQ)

LO-3



Accounting for the Direct Materials Price and Usage Variances•Issuance and usage of direct materials, assuming an unfavorable MUV Work in Process (SQ × SP)Direct Materials Usage Variance (AQ-AQ)SPMaterials (AQ × SP)

LO-3



Calculating Direct Labor Variances• The rate (price) and efficiency (usage) variances

for direct labor can be calculated using either the graphical, three-pronged approach or a formula approach

LO-3



Direct Labor Rate and Efficiency Variances: Formula Approach•Direct labor rate variance (LRV) computes the difference between what was paid to direct laborers and what should have been paid LRV = (AR × AH) – (SR × AH) OR (AR – SR)AHwhereAR = Actual hourly wage rateSR = Standard hourly wage rateAH = Actual direct labor hours used

LO-3



Direct Labor Rate and Efficiency Variances: Formula Approach•Direct labor efficiency variance (LEV) measures the difference between the direct labor hours that were actually used and the direct labor hours that should have been used LEV = (AH × SR) – (SH × SR) or (AH – SH)SRwhereAH = Actual direct labor hours usedSH = Standard direct labor hours that should have been usedSR = Standard hourly wage rate

LO-3



Accounting for the Direct Labor Rate and Efficiency Variance •Assume a favorable direct labor rate variance and an unfavorable labor efficiency variance

Work in Process (SH × SR)Direct Labor Efficiency Variance (AH –SH)SRDirect Labor Rate Variance (AH – SR) AHWages Payable (AH × AR)

LO-3



Investigating Direct Materials and Labor Variances•As random variations around the standard are expected, management should establish an acceptable range of performance•The acceptable range is the standard, plus or minus one allowable deviation•The top and bottom measures of the allowable range are called the control limits• The upper control limit is the standard plus the

allowable deviation and the lower control limit is the standard minus the allowable deviation

LO-3



Disposition of Direct Materials and Direct Labor Variances•All variances are closed out at the end of the year• Immaterial variances are closed to Cost of Goods

Sold• Materials variances are prorated among Work in

Process, Finished Goods, and Cost of Goods Sold

LO-3


VARIANCE ANALYSIS: OVERHEAD COSTS

Four-Variance Method for Calculating Overhead Variances•Calculates two variances for variable overhead and two variances for fixed overhead•Total variable overhead variance is divided into two components: the variable overhead spending variance and the variable overhead efficiency variance•The total fixed overhead variance is divided into two components: the fixed overhead spending variance and the fixed overhead volume variance LO-

4



Variable Overhead Spending Variance •Measures the aggregate effect of differences in the actual variable overhead rate (AVOR) and the standard variable overhead rate (SVOR)

VOSV = (AVOR × AH) – (SVOR × AH)•Variable overhead is assumed to vary as the production volume changes – variable overhead changes in proportion to changes in the direct labor hours used

LO-4



Variable Overhead Efficiency Variance•Measures the change in variable overhead consumption that occur because of the efficient/inefficient use of direct labor

VOEV = (SVOR × AH) – (SVOR × SH)

LO-4


EXHIBIT 9.4—VARIABLE OVERHEAD SPENDING VARIANCE BY ITEM

LO-4


EXHIBIT 9.5—VARIABLE OVERHEAD SPENDING AND EFFICIENCY VARIANCES BY

ITEM

LO-4



Fixed Overhead Spending Variance •Difference between the actual fixed overhead and the budgeted fixed overhead

FOSV=AFOH − BFOHAFOH = Actual fixed overheadBFOH = Budgeted fixed overhead

•If less (more) is spent on fixed overhead items than was budgeted, the spending variance is favorable (unfavorable)

LO-4



Fixed Overhead Volume Variance •Difference between budgeted fixed overhead and applied fixed overhead

Volume variance = Budgeted fixed overhead – Applied fixed overhead

LO-4



Fixed Overhead Volume Variance •If actual production is less than budgeted production, the volume variance will be unfavorable•If actual production is more than budgeted production, the volume variance will be favorable•The difference is due solely to the differences in production or planned utilization of capacity

LO-4


EXHIBIT 9.6—FIXED OVERHEAD SPENDING VARIANCE BY ITEM

LO-4



Accounting for Overhead Variances•To assign overhead to production

Work in ProcessVariable Overhead ControlFixed Overhead Control

LO-4



Accounting for Overhead Variances•To recognize the incurrence of actual overhead

Variable Overhead ControlFixed Overhead ControlVarious Accounts

LO-4



Accounting for Overhead Variances•To recognize the variances

Fixed Overhead ControlVariable Overhead Efficiency VarianceFixed Overhead Spending VarianceVariable Overhead ControlVariable Overhead Spending VarianceFixed Overhead Volume Variance

LO-4



Accounting for Overhead Variances•To close the variances to Cost of Goods Sold

Fixed Overhead Volume VarianceCost of Goods Sold

Cost of Goods SoldVariable Overhead Spending VarianceVariable Overhead Efficiency VarianceFixed Overhead Spending Variance

LO-4


EXHIBIT 9.7—TWO-VARIANCE ANALYSIS: HELADO COMPANY

LO-4


EXHIBIT 9.8—THREE-VARIANCE ANALYSIS:

HELADO COMPANY

LO-4


MIX AND YIELD VARIANCES: MATERIALS AND LABOR

• Mix variance: created whenever the actual mix of inputs differs from the standard mix

• Yield variance: occurs whenever the actual yield (output) differs from the standard yield

LO-5



Direct Materials Mix Variance•Difference in the standard cost of the actual mix of inputs use and the standard cost of the mix of inputs that should have been used•If relatively more of a more expensive input is used, the mix variance will be unfavorable•If relatively more of a less expensive input is used, the mix variance will be favorable.

LO-5

Mix Variance = SPiSMiAQi )(



Direct Materials Yield Variance•Designed to show the extent to which the amount of input resulted in the expected amount of outputYield variance = (Standard yield – Actual yield) SpywhereStandard yield = yield ratio × total actual inputsYield ratio = total output/total inputSPy = Standard cost of the yield

LO-5


END OF CHAPTER 9

standard costing: a functional-based control approach

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