standard costs & variance-analysis

8/10/2019 Standard Costs & Variance-Analysis

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Copyright 2006, The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin

Variance Analysis


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Standard Costs

Standards are benchmarks or normsfor measuring performance. Two types

of standards are commonly used.

Quantity standardsspecify how much of an

input should be used tomake a product orprovide a service.

Cost (price)standards specify

how much should bepaid for each unit

of the input.


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Accountants, engineers, purchasing

agents, and production managers

combine efforts to set standards that

encourage efficient future production.

Setting Standard Costs


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Setting Direct Material Standards

PriceStandards

Summarized ina Bill of Materials.

Final, deliveredcost of materials,net of discounts.

QuantityStandards


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Setting Direct Labor Standards

RateStandards

Often a singlerate is used that reflectsthe mix of wages earned.

TimeStandards

Use time andmotion studies for

each labor operation.


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Setting Variable Overhead Standards

RateStandards

The rate is thevariable portion of the

predetermined overhead

rate.

ActivityStandards

The activity is thebase used to calculate

the predetermined

overhead.



Are standards the

same as budgets?A budgetis set for

total costs.

Standards vs. Budgets

Astandardis a per

unit cost.Standards are often

used whenpreparing budgets.



Price and Quantity Standards

Price and quantity standards aredetermined separately for two reasons:

The purchasing manager is responsible for rawmaterial purchase prices and the production manageris responsible for the quantity of raw material used.

The buying and using activities occur at different times.Raw material purchases may be held in inventory for aperiod of time before being used in production.



A General Model for Variance Analysis

Variance Analysis

Price Variance

Difference betweenactual price andstandard price

Quantity Variance

Difference betweenactual quantity andstandard quantity



Variance Analysis

Price Variance Quantity Variance

Materials price varianceLabor rate variance

VOH spending variance

Materials quantity varianceLabor efficiency varianceVOH efficiency variance





Actual Quantity Actual Quantity Standard Quantity

Actual Price Standard Price Standard Price



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Standard quantity is the standard quantityallowed for the actual output for the period.







Actual price is the amount actuallypaid for the for the input used.




Standard priceis the amount that shouldhave been paid for the input used.







(AQ AP)(AQ SP) (AQ SP)(SQ SP)

AQ = Actual Quantity SP = Standard PriceAP = Actual Price SQ = Standard Quantity






Glacier Peak Outfitters has the following directmaterial standard for the fiberfill in its mountain

parka.

0.1 kg. of fiberfill per parka at $5.00 per kg.

Last month 210 kgs of fiberfill were purchased

and used to make 2,000 parkas. The materialcost a total of $1,029.

Material Variances Example



210 kgs. 210 kgs. 200 kgs.

$4.90 per kg. $5.00 per kg. $5.00 per kg.

= $1,029 = $1,050 = $1,000

Price variance$21 favorable

Quantity variance$50 unfavorable



Material Variances Summary

Material Variances



Material Variances:Using the Factored Equations

Materials price varianceMPV = AQ (AP - SP)

= 210 kgs ($4.90/kg - $5.00/kg)

= 210 kgs (-$0.10/kg)

= $21 F

Materials quantity variance

MQV = SP (AQ - SQ)

= $5.00/kg (210 kgs-(0.1 kg/parka2,000 parkas))

= $5.00/kg (210 kgs - 200 kgs)

= $5.00/kg (10 kgs)

= $50 U



Material Variances

The price variance iscomputed on the entire

quantitypurchased.The quantity varianceis computed only on

the quantityused.



Responsibility for Material Variances

Materials Price VarianceMaterials Quantity Variance

Production Manager Purchasing Manager

The standard price is used to compute the quantity varianceso that the production manager is not held responsible for

the purchasing managers performance.


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Glacier Peak Outfitters has the following directlabor standard for its mountain parka.

1.2 standard hours per parka at $10.00 per hour

Last month employees actually worked 2,500hours at a total labor cost of $26,250 to make

2,000 parkas.

Labor Variances Example


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2,500 hours 2,500 hours 2,400 hours

$10.50 per hour $10.00 per hour. $10.00 per hour

= $26,250 = $25,000 = $24,000

Rate variance$1,250 unfavorable

Efficiency variance$1,000 unfavorable

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate

Labor Variances Summary

Labor Variances:


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Labor Variances:Using the Factored Equations

Labor rate varianceLRV = AH (AR - SR)

= 2,500 hours ($10.50 per hour$10.00 per hour)

= 2,500 hours ($0.50 per hour)

= $1,250 unfavorable

Labor efficiency variance

LEV = SR (AH - SH)

= $10.00 per hour (2,500 hours2,400 hours)

= $10.00 per hour (100 hours)

= $1,000 unfavorable


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Responsibility for Labor Variances

Production Manager

Production managers areusually held accountable

for labor variancesbecause they can

influence the:

Mix of skill levelsassigned to work tasks.

Level of employeemotivation.

Quality of productionsupervision.

Quality of trainingprovided to employees.

Variable Manufacturing Overhead


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Glacier Peak Outfitters has the following directvariable manufacturing overhead labor standard

for its mountain parka.

1.2 standard hours per parka at $4.00 per hour

Last month employees actually worked 2,500hours to make 2,000 parkas. Actual variablemanufacturing overhead for the month was

$10,500.

Variable Manufacturing OverheadVariances Example



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2,500 hours 2,500 hours 2,400 hours

$4.20 per hour $4.00 per hour $4.00 per hour

= $10,500 = $10,000 = $9,600

Spending variance$500 unfavorable

Efficiency variance$400 unfavorable

Actual Hours Actual Hours Standard Hours

Actual Rate Standard Rate Standard Rate

Variable Manufacturing OverheadVariances Summary



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Variable Manufacturing OverheadVariances: Using Factored Equations

Variable manufacturing overhead spending varianceVMSV = AH (AR - SR)

= 2,500 hours ($4.20 per hour$4.00 per hour)

= 2,500 hours ($0.20 per hour)

= $500 unfavorable

Variable manufacturing overhead efficiency variance

VMEV = SR (AH - SH)

= $4.00 per hour (2,500 hours2,400 hours)

= $4.00 per hour (100 hours)

= $400 unfavorable

Variance Analysis and


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Variance Analysis andManagement by Exception

How do I knowwhich variances to

investigate?

Larger variances, indollar amount or asa percentage of the

standard, areinvestigated first.

Exh.


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A Statistical Control Chart

1 2 3 4 5 6 7 8 9

Variance Measurements

Favorable Limit

Unfavorable Limit

Warning signals for investigation

Desired Value

10-9


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Advantages of Standard Costs

Management byexception

Advantages

Promotes economyand efficiency

Simplifiedbookkeeping

Enhancesresponsibility

accounting


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PotentialProblems

Emphasis onnegative may

impact morale.

Emphasizing standardsmay exclude other

important objectives.

Favorablevariances may

be misinterpreted.

Continuousimprovement maybe more important

than meeting standards.

Standard costreports may

not be timely.

Invalid assumptionsabout the relationship

between labor

cost and output

Potential Problems with Standard Costs

standard costs & variance-analysis

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